Non-Accredited vs. Accredited Investors: Key Differences Explained

What Is a Non-Accredited Investor?

A non-accredited investor, often referred to as a retail investor, is someone who does not fulfill the Security and Exchange Commission (SEC) financial criteria for accreditation.

These investors earn less than $200,000 annually or $300,000 when combined with a spouse. They possess a net worth of under $1 million, excluding their homes. They’re significant, however, because they represent the majority of the market’s participants, actively buying stocks, bonds, and other publicly traded securities.

Given their financial limitations, the SEC enforces regulations to protect these investors from high-risk financial products.

Understanding Non-Accredited Investors

As noted above, non-accredited investors are commonly referred to as retail investors. Although it isn’t easy to pinpoint an exact number, there are significantly more non-accredited investors in the United States because of the strict criteria that define accredited investors. A non-accredited investor is anyone with:

• Annual income of less than $200,000 or $300,000 if combined with a spouse/partner
• A net worth of less than $1 million (excluding their primary residence)

Non-accredited investors are limited to the types of investments from which they can choose. Regulators put these restrictions in place to protect them from excessive risk and large financial losses that may result from complex financial instruments they may not understand. As such, the SEC uses acts and regulations to set out what these investors can invest in and what documentation and transparency investment companies need to provide.

The majority of investment options available to non-accredited investors are publicly traded, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They can also invest in alternative investment options, such as real estate investment trusts (REITs), real estate, and commodities.

Comparing Non-Accredited and Accredited Investors

An accredited investor can be an entity like a bank or company or an individual who doesn’t need SEC protections for their investments. This investor has a net worth exceeding $1 million (excluding their primary home) and an annual income exceeding $200,000 (or $300,000 with a spouse/partner) for each of the past two years with the expectation of the same for this year.

The SEC now defines accredited investors to include the following:

• Individuals with certain professional certifications, designations, or credentials
• Individuals who are “knowledgeable employees” of a private fund
• SEC- and state-registered investment advisors

Keep in mind that the SEC can change the definition of an accredited investor should inflation and other factors result in too much of the general population meeting the standard. This was the case on August 26, 2020, when the SEC said:

“The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify.”

The Role of Non-Accredited Investors in Private Companies

Private funds, private companies, and hedge funds can do things with investor money that mutual funds (and other investments) can’t do simply because they deal primarily with accredited investors. The SEC assumes that all parties involved know the risks and rewards involved, so they have a lighter regulatory touch where these funds are concerned.

That said, these funds must pay close attention to their compliance and make sure their investor counts stay within the rules because they can lose their regulatory status. For some types of private investment, they are only allowed non-accredited investors when they are employees or fit a specific exemption.

Other funds and companies can have unrelated non-accredited investors, but they must keep the number below a certain level. This is the case with Regulation D, which keeps the number of non-accredited investors in a private placement below 35.

The Bottom Line

The SEC’s classification of investors into accredited and non-accredited is intended to protect investors who have lower net worths and salaries, and those who may not understand all types of investments; particularly riskier ones. Accredited investors may be able to take more risks simply because they have more money.