Investors are classified as accredited or non-accredited based on guidelines set by the Securities and Exchange Commission (SEC) [US security and exchange commission ON SEC.gov]. These classifications determine the types of investments an individual can participate in.
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Accredited Investor: Meets criteria set forth by the SEC indicating financial sophistication. This allows them to invest in unregistered securities, which are generally considered riskier but may offer higher potential returns. To be accredited, an investor needs to meet at least one of the following requirements:
- Income: Individual income exceeding $200,000 annually (or $300,000 combined with a spouse) for the past two years with expectation of reaching the same this year.
- Net Worth: Individual or joint net worth exceeding $1 million, excluding the value of their primary residence.
- Professional Experience: Certain professional certifications or employment in the financial industry.
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Non-Accredited Investor: Anyone who doesn't meet the requirements for accredited investor status. Non-accredited investors are offered greater protection by regulations because they are presumed to have less investment knowledge and experience. They are generally restricted to investing in registered securities that go through a stricter approval process.