What is an Accredited Investor?
An accredited investor is an individual or organization allowed to participate in higher risk investments such as hedge funds, angel investor networks, and some limited partnerships.
How Does an Accredited Investor Work?
Generally, for U.S. individuals to be considered accredited, they must have a net worth of at least one million U.S. dollars or have made at least $200,000 each year for the previous two years.
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 Does an 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 higher-risk, more complex, and less regulated investments. This level of sophistication is (fortunately or unfortunately) measured by the investor's wealth.