An accredited investor is an individual or entity that meets certain criteria set forth by the Securities and Exchange Commission (SEC).
In order to be considered an accredited investor, an individual must earn an annual income of $200,000 (or $300,000 for joint filers) for the past two years and have a reasonable expectation of earning the same amount in the current year. Additionally, an accredited investor must have a net worth of $1 million dollars either individually or jointly with a spouse.
For entities, the requirements are more complex but generally include having assets under management of at least $5 million or gross annual revenues of at least $5 million. In addition, certain institutions such as banks, insurance companies, and registered investment advisers are automatically considered accredited investors.
The SEC’s accredited investor criteria are designed to protect investors from fraud and ensure that only those with the financial sophistication and means to take on the risks of investing in securities are able to do so.
The SEC sets these criteria in order to protect individuals from investing in high-risk ventures. Many startups and early stage companies are not required to register their securities with the SEC, which means there is less information available about these investments. As a result, they may be much more volatile and unpredictable than more established companies. By limiting investments to accredited investors, the SEC hopes to reduce the chances that regular people will lose their life savings by investing in a risky venture.