What is a Non-Accredited Investor?
A non-accredited investor is an individual or organization that does not meet the description of a 'sophisticated' investor as defined by the Securities and Exchange Commission.
How Does a Non-Accredited Investor Work?
According to the Securities Act of 1933, a person or entity must meet any of the following criteria to be deemed an accredited investor:
An accredited investor can be a bank, insurance company, registered investment company, business development company or small-business investment company. Also:
- Certain employee benefit plans.
- A charity, corporation, or partnership with assets of more than $5 million.
- A director, executive officer, or general partner of the issuer.
- A business in which all the equity owners are accredited investors.
- A person with individual or joint net worth (if the person is married) of more than $1 million at the time of purchase.
- A person with income of more than $200,000 in each of the last two years or joint income with a spouse exceeding $300,000 (and a reasonable expectation of that same income in the current year).
- A trust with assets of more than $5 million (note that the trust cannot be formed simply to acquire the securities offered).
Let's assume Company XYZ is a fairly small company that wants to raise some private capital to expand its operations. Normally, Company XYZ must write and distribute an offering memorandum and prospectus to potential equity investors, and the SEC must approve the contents of these documents to ensure that they disclose required and appropriate information.
However, if Company XYZ offers its shares only to accredited investors (this is often called a 'Regulation D' or 'Reg D' offering because the exemption falls under the portion of the 1933 Act of the same name), its offering memorandum and prospectus are not subject to the same level of SEC regulation. This in turn saves the company time, offering costs, and it doesn't have to jump through regulatory hoops. Non-accredited investors are not eligible to participate in the offering.
Why Does a Non-Accredited Investor Matter?
Many hedge funds, private equity firms, limited partnerships, and equity offerings in private companies are open only to accredited investors. The idea is that only investors of a certain level of sophistication should be able to participate in these higher-risk, complex and less regulated investments. This level of sophistication is (fortunately or unfortunately) measured by the investor's wealth. In turn, non-accredited investors may 'miss out' on certain investments.
