What it is:
How it works/Example:
According to the Securities Act of 1933, a person or entity must meet any of the following criteria to be deemed an accredited investor :
- A bank, insurance company, registered investment company, business development company, or small business investment company.
- Certain employee benefit plans.
- A charity, corporation, or partnership with assets over $5 million.
- A director, executive officer, or general partner of the issuer.
- A business in which all the equity owners are accredited investors.
- A investor with individual or joint net worth (if the person is married) of over $1 million at the time of purchase.
- An individual with income over $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 in come in the current year).
- A trust with assets over $5 million (note that the trust cannot be formed simply to acquire the securities offered).
Why it matters:
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 higher-risk, more complex, and less regulated investments. This level of sophistication is (fortunately or unfortunately) measured by the investor's wealth.