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What is a non-accredited investor?
A non-accredited investor is an investor who does not meet the minimum income or net worth requirements of the US Securities and Exchange Commission (SEC) to be considered an accredited investor.
In the United States, non-accredited investors are defined as individuals who make less than $200,000 annually ($300,000 combined income with a spouse) with a total net worth of less than $1 million when excluding their home.
Since most of the population lies below this high financial threshold, it is not surprising that non-accredited investors represent the vast majority of investors. Non-accredited investors are also known as "non-sophisticated investors".
People often refer to retail investors as non-accredited investors. However, this is a common misconception. The term retail investor refers to people who are not institutional investors (accredited or non-accredited).
Moreover, a non-accredited investor can only invest in investments regulated by the SEC, and their investments need to be documented and transparent.
Who is an accredited investor?
The basic definition of an accredited investor is an individual with a net worth of at least $1,000,000 (not including their home) or an annual salary of $200,000, or $300,000 combined household income with the person’s spouse. There are other criteria for an individual to be considered an accredited investor, such as the amount and type of assets and tax filing status.
Simply put, an accredited investor is someone who earns more than $200,000 per year or has more than $1,000,000 in assets.
The main advantage of being an accredited investor is that it provides a financial edge over others. For example, if you are planning to buy stock of a company on its IPO (Initial Public Offering), you will need to be an accredited investor. However, if you are planning to buy stock of an already public company, you do not need to be an accredited investor.
In August 2020, the SEC amended the definition of "accredited investor" to include investors who meet defined measures of professional knowledge, experience, or certification in addition to the existing tests of income or net worth.
As a result, even individuals who do not meet the net worth or income requirements, but who do possess the relevant experience or financial knowledge, can qualify for accreditation. This means being an executive of a company, a director of a company, a high net worth individual, a professional investor or a person with sophisticated knowledge or experience in financial matters could qualify to become an accredited investor.
In addition, under the recent amendments, entities may also qualify as institutional accredited investors if they maintain assets worth over $5 million and are owned entirely by accredited investors.
Accredited investor vs Non-accredited investor
A non-accredited investor is anyone making less than $200,000 annually (less than $300,000 including a spouse) with a total net worth of less than $1 million when their primary residence is excluded.
Whereas an individual is considered to be an accredited investor if they satisfy any of the following criteria:
- Earned an annual income of $200,000 individually (or $300,000 in joint income for spouses and spousal equivalents) or more for the last two fiscal years and reasonably expect to meet the same income threshold for the current fiscal year.
- A net worth of over $1 million (alone or together with a spouse) excluding the value of any primary residence.
- Individuals who have certain professional certifications, designations or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisers.
Accredited investors are allowed to buy and invest in unregistered securities as long as they satisfy one (or more) requirements regarding income, net worth, asset size, governance status, or professional experience. Accredited investors are legally entitled to purchase securities that have not been registered with regulatory authorities, such as the SEC.
However, when it comes to non-accredited investors, SEC regulations govern what they can invest in and what their investments must provide in terms of documentation and transparency.
Where can an accredited investor invest?
Since accredited investors are expected to be more knowledgeable about the ins and outs of financial transactions, they can invest in a wider variety of opportunities that are very lucrative and high risk. Accredited investors have no restrictions on what kind of investment they can make, which means they can invest in assets including:
- Hedge Funds
- Venture capital and private equity funds
- Real estate
- Other assets in the private capital markets
- Equity crowdfunding platforms, and more.
To raise capital efficiently, oftentimes these platforms will solely accept investment from accredited investors with minimum investment thresholds set at a high level.
Where can a non-accredited investor invest?
Non-accredited investors are subject to several more rules and regulations when purchasing securities. Companies offering securities need to disclose a lot of financial information on a regular basis so that non-accredited investors are able to make informed decisions.
So, in order to avoid compliance with the regulatory requirement to sell to non-accredited investors, many companies cater only to accredited investors to avoid the additional hassle.
Regulatory changes recently have made it easier and more cost-effective for businesses to offer securities to non-accredited investors. Therefore, non-accredited investors have access to more investment opportunities, particularly in real estate and equity crowdfunding.
Examples of such opportunities include:
- Real Estate Investment Trusts (REITs)
- Real estate crowdfunding
- Peer-to-peer lending
- Equity crowdfunding
Crowdfunding for Non-Accredited Investors
Crowdfunding is a way for people to pool money from a large number of investors to fund a project. It can be used to secure funds for any type of endeavour, including social projects or real estate, equity funding.
The crowdfunding process starts with an idea that someone needs funding for. The idea is usually written on a campaign page that has details about the project, how much it will cost, and what the money would be used for. People start donating money to the project and if enough funds are raised by the deadline, then the project can move forward. If not, all of the funds are returned and no one gets charged anything.
In this way, non-accredited investors can invest in sectors previously only available to accredited investors.
However, there remain some restrictions on the amount of money that non-accredited investors can invest. This is merely to reduce risks and to cap potential losses. The limits are set by the SEC based on the person's net worth and income.
According to the SEC,
- If you make less than $107,000 per year or your net worth is below that amount, you can invest up to either the greater of $2,200 or the lesser of 5% of your income or net worth.
- If your annual income and your net worth exceed $107,000, you can invest up to 10% of your income or net worth, whichever is less, up to a total limit of $107,000.
These are the two major types of crowdfunding for non-accredited investors:
1. Equity Crowdfunding
Since 2016, non-accredited investors are allowed to invest in equity crowdfunding. Equity crowdfunding is a new and growing way to raise funds for early-stage startups. Nowadays, many startups such as Gumroad have opted to use equity crowdfunding as a part of their early-round funding.
Unlike traditional crowdfunding, equity crowdfunding includes the exchange of small amounts of equity for financial support. This allows not only venture capitalists and angel investors to invest, but also common individuals to hold a piece of a high growth startup.
2. Real Estate Crowdfunding
For non-accredited investors, real estate crowdfunding is another popular method for investing. Non-accredited investors can buy real estate in cities such as New York and Mexico City on platforms such as Republic. Through it, they gain exposure to real estate apart from direct ownership and the use of real estate investment trusts (REITs).
Real estate crowdfunding allows investors to invest in debt or equity. When an investor invests in debt, they receive interest and mortgage repayments.