An accredited investor is an individual or entity that may have access to a restricted set of investment opportunities in virtue of being either sufficiently financially savvy to understand the associated risks or sufficiently wealthy to absorb the associated potential loss.
The Securities and Exchange Commission, the US government agency in charge of protecting investors and maintaining fair and orderly functioning of the securities market, defines what it is to be an accredited investor. According to its definition, for an individual to be an accredited investor, he/she must meet at least one of the following conditions:
- The net worth of at least $1,000,000, excluding the value of his/her primary residence (where net worth = total assets – total liabilities)
- The individual annual income of ≥ $200,000 for the past two years
- The combined annual income of ≥ $300,000 if married
- Demonstrate sufficient education or job experience showing their professional knowledge of unregistered securities (the SEC expanded the definition of accredited investor with this fourth condition on August 26, 2020)
The restricted investment opportunities to which accredited investors may gain access include:
- Real estate crowdfunding
- Venture capital funds
- Buying shares in a private company prior to an IPO
- Participating in hedge funds
- Investment in early-stage startups
These investment opportunities are considered both riskier and more complex than other investments. Hence, as a protective measure, the SEC restricts them to those who have the knowledge and wealth to understand and endure the associated potential loss.
It should be noted that there is no formal process that one goes through in order to acquire the accredited investor status. It is the responsibility of the organization that’s offering a restricted investment to verify that potential investors meet the requirements for being accredited.