A non-accredited investor refers to investors who fail to meet the net worth or income requirements defined by the Securities and Exchange Commission (SEC). Non-accredited investors are also known as retail investors.
Being a non-accredited investor does not mean that the individual cannot invest; however, investment opportunities for them are different from accredited investors. The options available for non-accredited investors include certain types of bonds, real estate, equities, and other securities.
Non-accredited investors are investors who fail to meet the net worth or income requirements determined by the SEC.
The SEC protects non-accredited investors by applying restrictions on their investment choices; examples include hedge funds and private equities.
There are more disclosure and documentation requirements for the funds available for non-accredited investors.
Characteristics of Non-Accredited Investors
After the 1929 financial crisis, the SEC was established to protect general investors from investing in the areas that they do not understand well or taking a large risk that they cannot afford. Thus, the SEC distinguishes non-accredited investors from accredited investors and regulates which investments non-accredited investors can make.
According to the current SEC rules, there are four standards for individuals to be considered accredited:
1. Having an annual income above $200,000;
2. Having a combined annual income above $300,000 with a spouse; or
3. Having a net worth above $1 million excluding the value of the one’s primary residence.
4. If the investment is made on behalf of a business, all the equity owners of a business with assets of more than $5 million.
Therefore, an individual investor is considered as a non-accredited investor if the individual’s annual income is lower than $200,000 (or $300,000 with a spouse) and owns assets that are worth less than $1 million besides the primary residence. Based on the standards, the great majority of Americans are non-accredited investors.
Non-accredited investors are limited by the SEC from some investment opportunities for their own financial safety. The SEC also set regulations on the disclosure and documentation of the investments available to the investors.
For example, non-accredited investors are eligible to invest in mutual funds. Compared with hedge funds and private equities, mutual funds need to be more transparent in their investment strategies and other fund information. The private funds that primarily target accredited investors are usually less regulated by the SEC.
Accredited investors refer to the high-net-worth investors who can meet the SEC requirements mentioned in the section above. Such investors are considered to be more sophisticated in investing activities; thus, they need less protection from the SEC.
The accredited investors’ high net worth and financial knowledge allow them to afford larger potential losses and make riskier investment choices. Investments targeting such investors generally come with higher risks and returns. Hedge funds, specialty investment funds, private equities, and venture capitals are some examples. The funds also provide less information to their investors.
The disclosure of a hedge fund’s specific strategies and portfolio holdings is sparse most of the time. Many hedge fund managers consider that disclosure might reduce the funds’ return and competitiveness.
Non-Accredited Investors and Crowdfunding
Crowdfunding raises funds in small amounts from a large pool of investors to make investments. It is typically processed through the network. There are various types of crowdfunding, depending on where the money is invested.
Some examples include real estate crowdfunding, equity crowdfunding, and peer-to-peer lending. Crowdfunding provides opportunities for non-accredited investors to invest in areas that were previously only available to accredited investors.
Since 2016, non-accredited investors are allowed to participate in equity crowdfunding. Many start-up companies use equity crowdfunding as a part of their early-round funding. Through equity crowdfunding, general investors can invest in and earn equity shares from the companies in their early stages. The high-net-worth venture capitalists and angel investors are no longer the only players.
Non-accredited investors can also invest in real estate crowdfunding. It provides them with an additional way to get exposure in real estate besides direct ownership and real estate investment trusts (REITs). Investors can choose between debt investment or equity investment for real estate crowdfunding. By investing in debt, the investor receives interest and repayments of a mortgage. By investing in equity, the investor earns the ownership stakes of a property.
Some restrictions still exist on the maximum amount of money that a non-accredited investor can invest annually. The limits are determined by the SEC based on an individual’s net worth and income level. The restrictions are applied to reduce investment risks and to cap potential losses for non-accredited investors who may lack sufficient knowledge in crowdfunding. There are no restrictions on investment amounts for accredited investors.
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