What Is a Non-Accredited Investor

Non-accredited investors do not pass the SEC's "accredited investor" test, as outlined in Rule 501 of Regulation D. This investor earns less than $200,000 a year (or $300,000 as a couple) and has a net worth of less than $1 million.

Non-accredited investors are restricted from participating in specific investment opportunities. However, there are benefits to your standing, such as enhanced safeguards against potentially harmful investments. Discover the restrictions and options available to you as a non-accredited investor.

Understanding Non-Accredited Investors

The majority of investors are not accredited. Retail investors typically refer to those who are not accredited, investors. Simply put, this includes the great majority of Americans who earn less than $200,000 per year and have fewer than $1 million in assets (not including the value of their primary residence).

According to 2015 data from the U.S. Census Bureau, accredited investors are still in the 95th percentile of the population, which is not as far away as it was when the criteria were formed. If inflation or other reasons cause a disproportionate number of people to meet the requirements, the SEC can adjust the accredited investor definition to reflect this reality.

How Being a Non-Accredited Investor Works

Many jurisdictions have "blue sky" rules that cap the percentage of a funding round from unaccredited investors and require the issuer to provide more information.

The Securities and Exchange Commission (SEC) has rules in place concerning the types of investments that can be made by non-accredited investors, as well as the level of disclosure and paperwork that must accompany such investments.

According to these federal securities rules, only accredited investors can participate in specific securities offerings.

What Individual Investors Need To Know

The ability to invest in some markets is restricted if you are not an accredited investor. You can invest in restricted securities, venture capital, and hedge funds if you meet the requirements for these asset classes if you are an accredited investor. 5 There is an excellent chance of loss with these investments and a high chance of gain. These investments are only available to accredited investors. Thus the general public cannot participate.

While the restrictions on non-accredited investors are annoying, they protect inexperienced investors from the potential ruin of gambling on high-risk ventures. For their safety, the SEC restricts the options available to non-accredited investors. After the stock market crisis of 1929, the SEC was established to safeguard ordinary people from investing in risky ventures beyond their means or understanding.

Private Firms and Investors Who Do Not Meet the Accreditation Requirement

To prevent fraud and abuse, non-accredited investors have fewer options. The SEC was established after the 1929 Crash and the ensuing slump to prevent ordinary people from entering into investments beyond their means or understanding.

The Securities and Exchange Commission (SEC) employs legislation and regulations to define who qualifies as a non-accredited investor and what information and disclosures those investments must supply. Because they only deal with authorised investors, private firms and hedge funds can do things with investor money that mutual funds are restricted from doing.

The SEC relaxes its regulatory grip on these funds, assuming that all participants understand the potential benefits and dangers.

In light of this potential risk, these funds must pay particular attention to compliance and ensure their investor counts remain within the regulations. In specific private investment opportunities, non-accredited investors are only permitted if they are employees or fall under a notable exception.

Other funds and businesses can have non-related, non-accredited investors, but only up to a specified cap. To comply with Regulation D, the number of unaccredited investors in a private placement must be under 35.

Non-Accredited Investors and Crowdfunding

Many people can contribute small sums of money to a project through crowdfunding. Typically, it goes over the network for processing. Crowdfunding can be broken down into subcategories based on the target of the investors' contributions.

Crowdfunding takes many forms; real estate crowdfunding, crowdfunding for stocks, and peer-to-peer financing are just a few. Crowdfunding allows those who do not meet the traditional definition of an investor to gain access to investment opportunities previously reserved for authorised investors.

In 2016, the Securities and Exchange Commission ruled that even non-accredited investors might participate in equity crowdfunding. Many new businesses use equity crowdfunding as a form of initial finance. In the early phases of a company's development, equity crowdfunding allows ordinary people to participate in the business and receive ownership stakes in return. There are no other actors besides wealthy venture capitalists and angel investors.

Crowdfunding for real estate is open to both accredited and non-accredited investors. It gives them another option for gaining real estate exposure alongside REITs and outright purchases (REITs). For real estate crowdfunding, investors can either take on debt or invest in the company's equity. To profit from debt investing, one must anticipate interest and mortgage payments. The investor acquires a portion of the property's equity by purchasing equity interests.

There are still limits on how much a non-accredited investor can put away each year. The SEC sets the restrictions after considering a person's wealth and salary. Non-accredited investors, who may lack the necessary understanding for crowdfunding, are subject to the conditions to limit their risk exposure and protect them from catastrophic losses. For qualified investors, there is no ceiling on the amount they can put in.