Legal Definitions - accredited investor

An accredited investor is a specific category of investor, recognized under federal securities law, who is considered financially sophisticated and capable of understanding and bearing the risks associated with certain investments. Due to their presumed expertise or substantial financial resources, these investors are permitted to participate in investment opportunities, such as purchasing unregistered securities, that are not available to the general public.

While accredited investors gain access to a broader range of investments, they also forgo some of the protective disclosures typically mandated by securities regulations for ordinary investors. This is because the law presumes they do not require the same level of regulatory protection. However, they still retain legal recourse in cases of fraud.

Common criteria for qualifying as an accredited investor include:

• Individuals with a net worth exceeding $1 million (excluding their primary residence), either individually or jointly with a spouse or partner.
• Individuals with an income exceeding $200,000 in each of the two most recent years (or $300,000 jointly with a spouse or partner) and an expectation of the same income in the current year.
• Certain financial institutions like banks, insurance companies, and registered investment companies.
• Entities such as trusts, corporations, or partnerships with assets exceeding $5 million, provided they were not formed specifically to acquire the securities being offered.
• Individuals holding specific professional certifications, such as a Series 7, Series 65, or Series 82 license.

Here are some examples illustrating the concept of an accredited investor:

• Example 1: A Tech Entrepreneur

  Maria, a retired software engineer, has accumulated a personal investment portfolio worth $3.5 million, in addition to her primary residence. Because her net worth, excluding her home, significantly exceeds $1 million, she qualifies as an accredited investor. This status allows her to invest in a promising startup's private equity round, an opportunity that is not registered with the Securities and Exchange Commission (SEC) and therefore unavailable to the general public. Her accreditation signifies that she is presumed to have the financial knowledge and capacity to evaluate the risks of such an unregistered investment.

• Example 2: A University Endowment Fund

  The Evergreen University Endowment Fund manages over $500 million in assets, overseen by a team of professional fund managers. As a large institutional investor with substantial assets and expert financial staff, the endowment fund is automatically considered an accredited investor. This enables it to allocate a portion of its capital to a hedge fund that offers complex, unregistered investment strategies, which would be too risky and opaque for an average retail investor.

• Example 3: A Licensed Financial Professional

  David works as a financial advisor and holds a Series 65 license, which certifies him as an Investment Adviser Representative. Although David's personal income and net worth do not meet the typical thresholds for individual accredited investors, his professional license qualifies him. This allows him to participate in a private real estate syndication deal, even though it is an unregistered offering, because his professional accreditation demonstrates his specialized knowledge and experience in financial matters.