An accredited investor as an individual in the U.S. is someone with a net worth of at least $1 million USD (not including the value of the person’s primary residence), or a minimum yearly income of $200,000 USD as a single person, or $300,000 USD jointly with a spouse or spousal equivalent for the previous two years, with the expectation of making at least that much in the coming year. Of course, there are ways to meet accredited investor requirements now and some entities may also qualify as an accredited investor.
After becoming an accredited investor, you are able to invest in certain private investments which are often more risky, less liquid, and less complicated than public bonds and equities. These investments include angel investing, venture capital, private equity, real estate crowdfunding, limited partnerships, and hedge funds.
Is the Definition of Accredited Investor Fair?
The main mission of the U.S. Securities and Exchange Commission is to protect investors financially from entering into investments that are excessively risky or those that are unlawful or dishonest in some way. The agency tries to protect investors from scams or schemes that can cause much financial damage to investors.
The question at hand may begin with questioning whether the $1 million USD net worth and $200,000 USD and $300,000 USD accredited investor requirements are reasonable before someone may operate as an accredited investor. The idea behind these thresholds is that individuals with these financial resources are more sophisticated and intelligent financially than those who do not possess these resources.
Also, the idea behind these metrics is that accredited investors at these financial thresholds have the ability to withstand financial losses from investments gone bad than other less wealthy investors.
Accredited Investors Aren’t Necessarily More Intelligent
The facts however are that many accredited investors lose a lot of money on investments. Also, many people with $1 million USD in net worth did not make their money by investing, but from an inheritance, the sale of a business, or the money generated by the business. As such, they are not automatically more sophisticated or intelligent in the financial or investing sense.
Also, a person who has $250,000 USD in net worth is going to invest a smaller amount of money most likely, than someone with $1 million USD in net worth. So there is a reasonable argument to make, just from these observations that some of the accredited investor requirements are not reasonable or fair, at least those based on net worth, and potentially, yearly income.
