Non accredited investor

What Is Non accredited investor?

A non-accredited investor is an individual or entity that does not meet the specific financial or professional criteria established by regulatory bodies, most notably the Securities and Exchange Commission (SEC) in the United States. This classification is a fundamental aspect of investment regulation and is primarily designed for investor protection, limiting access to certain higher-risk or less transparent investment opportunities. The SEC's rules aim to shield individuals who may not have the financial sophistication or capacity to absorb significant losses from complex, unregulated securities. The majority of individuals fall into the category of a non-accredited investor, given the financial thresholds for accredited status.

History and Origin

The distinction between accredited and non-accredited investors originated from the Securities Act of 1933, which mandated that companies register securities offerings with the SEC to ensure public disclosure and investor protection. However, certain exemptions were created for offerings made to sophisticated investors who could "fend for themselves" and thus did not require the same level of regulatory oversight. This concept evolved, and in 1982, the SEC formally defined the "accredited investor" in Regulation D, setting income and net worth thresholds that have largely remained in place, albeit with some adjustments over time. The purpose was to streamline capital raising for businesses while maintaining safeguards for the general public¹⁷.

A significant development impacting non-accredited investors was the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. This legislation aimed to encourage small business funding by easing securities regulations, notably by introducing provisions like Regulation Crowdfunding. Title III of the JOBS Act, which became effective in 2016, specifically allowed non-accredited investors to participate in equity crowdfunding for private startups and small businesses, democratizing access to early-stage investments that were previously limited to accredited investors¹⁶,¹⁵.

Key Takeaways

• A non-accredited investor is an individual or entity that does not meet the SEC's specific income, net worth, or professional criteria for an accredited investor.
• The primary purpose of this classification is to provide greater investor protection for those who may have less financial sophistication or a lower capacity for risk.
• Non-accredited investors generally have restricted access to unregistered securities, such as certain private placement offerings, venture capital funds, and hedge fund investments.¹⁴
• The JOBS Act introduced new avenues, like equity crowdfunding, that allow non-accredited investors to participate in certain private offerings under specific limitations and disclosure requirements.¹³
• Most common investment vehicles, including publicly traded stocks, bonds, mutual funds, and Exchange-Traded Fund (ETF)s, are available to non-accredited investors.

Interpreting the Non accredited investor

The status of a non-accredited investor is not a measure of an individual's financial acumen but rather a regulatory classification. For a natural person, it typically means their annual income is less than $200,000 (or $300,000 jointly with a spouse) for the two most recent years, and their net worth is less than $1 million, excluding the value of their primary residence.

For a non-accredited investor, this classification translates into limitations on specific types of investments considered higher risk or less transparent due to reduced regulatory oversight. These typically include investments in private companies, certain real estate syndications, and private equity. Regulators impose these restrictions to mitigate potential financial harm, assuming that individuals below these thresholds may not fully comprehend or withstand the risks associated with such investments¹². Despite these limitations, a wide array of investment opportunities remains available to non-accredited investors, encompassing publicly traded securities such as stocks, bonds, mutual funds, and Exchange-Traded Fund (ETF)s.

Hypothetical Example

Sarah, a 30-year-old marketing professional, earns an annual salary of $75,000, and her net worth, excluding her home, is $50,000. Based on these financial metrics, Sarah is a non-accredited investor. She is interested in diversifying her investment portfolio and has been hearing about promising local startups.

Because of her non-accredited status, Sarah cannot directly invest in a startup's private fundraising round that is exclusively open to accredited investors under Regulation D Rule 506(b) or 506(c). However, under Regulation Crowdfunding (Title III of the JOBS Act), Sarah can invest in startups raising capital through SEC-registered crowdfunding platforms. These platforms provide disclosure documents for review. Sarah decides to invest $1,000 in a local tech startup through such a platform. The platform's rules limit her investment to a certain percentage of her income or net worth annually, ensuring she doesn't overcommit to highly speculative ventures.

Practical Applications

The non-accredited investor status is most evident in the context of private market offerings. Companies seeking to raise capital without the extensive and costly process of registering their securities with the SEC often rely on exemptions that permit sales only to accredited investors. However, avenues created by the Jumpstart Our Business Startups (JOBS) Act have expanded opportunities for a non-accredited investor.

One key area is equity crowdfunding. Under Regulation Crowdfunding, companies can raise capital from a broad base of investors, including non-accredited individuals, up to a certain financial limit. This allows ordinary investors to support and potentially benefit from early-stage businesses. However, these investments often carry significant risks, including illiquidity and potential for loss. The Financial Industry Regulatory Authority (FINRA) provides warnings about the dangers associated with private placements and other unregistered offerings, emphasizing the need for caution and due diligence from all investors. FINRA advises investors to be wary of private placement recommendations, highlighting that these securities are often illiquid and may not have a clear secondary market¹¹,¹⁰.

Limitations and Criticisms

While the classification of a non-accredited investor is intended to provide investor protection, it also faces significant limitations and criticisms. A primary critique is that the financial thresholds (income and net worth) do not necessarily correlate with an individual's financial literacy or ability to understand investment risks⁹. A well-educated individual with strong financial knowledge but modest income may be categorized as a non-accredited investor, thus being barred from certain opportunities available to someone with higher income but less understanding.

Critics argue that this distinction creates an unequal playing field, limiting wealth-building opportunities for the average investor by restricting access to potentially high-growth private markets. This "paternalistic" approach by the SEC has been challenged for dictating how individuals can invest their money, regardless of their personal risk tolerance or financial education⁸. Furthermore, even with the expanded access provided by equity crowdfunding under the JOBS Act, limitations on investment amounts for a non-accredited investor still exist, capping their potential participation in these ventures⁷.

Non accredited investor vs. Accredited investor

The core difference between a non-accredited investor and an accredited investor lies in the regulatory definition provided by the Securities and Exchange Commission (SEC). An accredited investor is deemed to possess sufficient financial sophistication and capacity to withstand greater investment risks, largely due to meeting specific income or net worth thresholds (e.g., annual income over $200,000 for an individual or $300,000 jointly, or a net worth exceeding $1 million excluding primary residence). Recently, certain professional certifications or designations have also been added to the criteria for accredited status⁶,.

Conversely, a non-accredited investor does not meet these criteria. This distinction fundamentally impacts the types of investments available. Accredited investors have access to a broader range of unregistered securities offerings, such as certain private equity deals, venture capital funds, and hedge funds, which typically offer less disclosure and regulatory oversight. A non-accredited investor, on the other hand, is generally limited to investments that are registered with the SEC and therefore subject to more stringent disclosure requirements, such as publicly traded stocks, bonds, and regulated funds like mutual funds.

FAQs

What types of investments can a non-accredited investor make?

A non-accredited investor can typically invest in publicly traded securities such as stocks, bonds, mutual funds, and Exchange-Traded Fund (ETF)s. Additionally, with the advent of the Jumpstart Our Business Startups (JOBS) Act, they can also participate in certain equity crowdfunding offerings, subject to specific investment limits.⁵,

Why are non-accredited investors restricted from certain investments?

Restrictions for a non-accredited investor are primarily for investor protection. The Securities and Exchange Commission (SEC) aims to shield individuals who may lack the financial capacity or expertise to evaluate the risks of complex, unregistered securities, which typically offer less transparency and liquidity.,⁴

Can a non-accredited investor become an accredited investor?

Yes, a non-accredited investor can become an accredited investor if they meet the SEC's defined criteria. For individuals, this typically involves achieving specific income thresholds (e.g., over $200,000 annually for two consecutive years) or net worth (over $1 million excluding a primary residence). Certain professional licenses can also qualify an individual as an accredited investor.³,

Are there any new opportunities for non-accredited investors to invest in startups?

Yes, the Jumpstart Our Business Startups (JOBS) Act created new opportunities through Regulation Crowdfunding. This allows a non-accredited investor to invest in private companies and startups through SEC-registered crowdfunding portals, although there are limits on the amount they can invest based on their income and net worth.²,¹