What is an Accredited Investor?

An accredited investor is a legal entity or natural person allowed to trade unregistered and unregulated securities. Generally, only investors registered with a governing financial organization can sell or publicly exchange securities such as stocks and bonds. 

Which body governs accredited investors?

The Securities and Exchange Commission (SEC) is the governing financial organization for investors in the US. Investors must meet strict criteria to qualify as accredited investors.

The SEC offers a full definition of accredited investors that covers the various requirements they must satisfy to legally earn the title. The SEC last amended its definition for accredited investors in August 2020 to include all types of entities and individuals meeting certain criteria.

Partaking in unregistered investment opportunities requires accreditation to ensure that the investor possesses the financial reasoning and cushion to withstand significant losses. The SEC governs registered securities under strict operating guidelines and standards. This keeps them from becoming too risky for the general public to purchase. Unregistered securities offer no such protections and are inherently more dangerous to investors for this reason.

How to become an accredited investor

A natural person or legal entity must meet a minimum income or investment threshold to qualify as an accredited investor. Per the SEC's guidelines, a person's or institution's income must be greater than $200,000 - $300,000 for 2 consecutive years to qualify as an accredited investor. Otherwise, the investor can’t purchase an unregistered security.

They should also reasonably anticipate similar income for the year in which they make such a purchase. Failing this requirement does not necessarily mean such investors don’t qualify. Any person or entity with a net worth in excess of $1M is also considered an accredited investor, but the value of their primary residence can’t be included. Individuals may pool their resources with a spouse or spousal equivalent to meet the income and asset requirements described by the SEC.

The SEC’s 2020 amendment also introduced an additional option for those seeking the title of accredited investor. Certain professional certifications and credentials now grant accredited investor status to those who obtain and maintain them. 

These currently include general securities representative licenses as well as licenses for investment adviser representatives. Individuals considered to be "knowledgeable employees" at a financial firm may also qualify as accredited investors. Knowledgeable employees include executive officers, trustees, directors, advisory board members, general partners, or similar roles. These individuals must prove they are employed at a suitable firm and are considered "knowledgeable."

The illegal sale of unregistered securities to non-accredited investors is a felony offense with a penalty of up to five years in a federal prison. However, there is no formal process for becoming an accredited investor. There is also no such process for determining whether an individual or organization qualifies as an accredited investor.

Investors are instead assessed on a case-by-case basis to determine their status. This process is normally handled by companies looking to sell their own unregistered securities. Securities sellers carefully audit prospective buyers' backgrounds and finances before making a transaction. During official investigations, the SEC may conduct its own audit to determine if investors are accredited.