There is a big difference between accredited and non-accredited investors. Understanding the difference is key to knowing which type of investor you are or understanding the type of investor your offering is targeting. Let’s look at each type of investor and find out more about their specific benefits and limitations.
Accredited Investors
An accredited investor is an individual or institution that has been approved by the Securities and Exchange Commission (SEC) to invest in certain types of securities. These investments are typically unavailable to the retail investor, as they are considered high-risk and high-return. Historically, accredited investors have been able to:
- Access to exclusive investment opportunities: Traditionally, many startups and early-stage companies will only accept investments from accredited investors, as they were considered to be more sophisticated and able to handle the higher risk.
- Invest in private companies: Many accredited investors choose to invest in private companies, as they can offer higher returns than public companies. Before the JOBS Act, only accredited were able to invest in these companies.
To become an accredited investor, an individual must meet certain criteria set forth by the SEC. These include:
- Entities that have assets of $5 million.
- Earning an annual income of $200,000 (or $300,000 for couples) for the past two years.
- Having a net worth of $1 million (excluding their primary residence).
Investing in private companies is often considered a high-risk investment, as there is often less information available about these companies than public companies. However, accredited investors are typically seen as more sophisticated and able to handle the higher risk.
Non-accredited Investors
A non-accredited investor is an individual who does not have the financial qualifications to be deemed an accredited investor. This can be due to a low net worth or a lack of investment experience. Historically, many non-accredited investors may have missed out on beneficial investment opportunities, especially in the private market. However, with the rise of JOBS Act exemptions, we are seeing more companies looking toward nonaccredited investors. The benefits of being a nonaccredited investor include:
- No SEC qualification: Anyone with the desire to invest can be a non-accredited investor. There are no criteria set by the SEC that must be met.
- Access to new and exciting companies: Companies can tap into a new pool of potential investors by marketing toward non-accredited investors. These investors can also tap into a broader range of investment opportunities that may have been unavailable before the JOBS Act was passed into law.
- The ability to invest smaller amounts of money: For non-accredited investors, the minimum investment amount is often lower than it is for accredited investors. This can be helpful for those who want to get started in investing but don’t have a large sum of money to put towards it.
As the private market continues to grow, both non-accredited and accredited investors alike can take advantage of exciting opportunities to invest in growing companies. The JOBS Act has also done an incredible job leveling the playing field for investors, which will only incentive more companies to tap into the growing pool of potential investors.