What is an unaccredited investor?

Definition and Examples of Non-Accredited Investors

A non-accredited investor is a type of investor who does not meet the requirements of Rule 501 of Regulation D of the federal securities laws and the accredited investor test set by the U.S. Securities and Exchange Commission (SEC). This means that the investor in question has a net worth of less than one million dollars and an individual income of less than $200,000 per year, or $300,000 if married.

If you are a non-accredited investor, you will not have the same investment opportunities as accredited investors. However, there are advantages to your status, including increased protection from risky investments. Here’s what you need to know about the restrictions and benefits of being a non-accredited investor.

How Does a Non-Accredited Investor Work?

In many states, there are “blue sky laws” that limit the number of non-accredited investors that can be included in a funding round before companies must make further disclosures. The SEC also has regulations governing what a non-accredited investor can invest in, and how those investments should be handled in terms of documentation and transparency.

If you are an accredited investor under these federal securities laws, you can participate in certain security offerings that non-accredited investors cannot.

What Individual Investors Need to Know

Being a non-accredited investor limits your full investment opportunities. For example, if you are an accredited investor, you can invest in restricted securities, venture capital, and alternative investment funds. These investments come with significant risks but also the potential for high rewards. Non-accredited investors do not have the opportunity to profit from these investments.

The restrictions on non-accredited investors may be frustrating, but they help prevent less experienced investors from losing money in high-risk ventures. The SEC sets investment options for non-accredited investors to protect them. The agency was created after the stock market crash of 1929 to safeguard ordinary consumers from making investments they cannot afford or fully understand.

Key Takeaways

A non-accredited investor fails to meet the Rule 501 requirements of Regulation D of the federal securities laws and the accredited investor test set by the SEC. To be considered a non-accredited investor, one must have a net worth of less than one million dollars and receive less than $200,000 annually in income (or $300,000 if married), and must not hold a Series 7, 65, or 82 license.

Blue sky laws exist in many states that set limits on the number of non-accredited investors that can be included in a funding round before companies must provide further disclosure. The SEC determines investment options for non-accredited investors to protect them from losses they cannot afford and from making investments they do not fully understand.

Sources:

Code of Federal Regulations. “Regulation D, Section 230.501.” Accessed Nov. 2, 2021.

Investor.gov. “Accredited Investors – Updated Investor Bulletin.” Accessed Nov. 2, 2021.

U.S. Securities and Exchange Commission. “Accredited Investor Definition.” Accessed Nov. 2, 2021.

U.S. Securities and Exchange Commission. “Frequently Asked Questions About Exempt Offerings.” Accessed Nov. 2, 2021.

U.S. Securities and Exchange Commission. “Investor Bulletin: Private Placements Under Regulation D.” Accessed Nov. 2, 2021.

Source: https://www.thebalancemoney.com/non-accredited-investor-5208256