What is an Accredited Investor? Based on the U.S. Securities legislation, only accredited investors are allowed to invest in venture capital, private placements, private equity, and hedge funds.
According to the Securities Act of 1933, Regulation D, Rule 501, an accredited investor is:
(1) an individual or a married couple (joint) with a net worth exceeding one million dollars, which excludes the value of the primary residence; or
(2) a person whose income has exceeded $200,000 for two recent consecutive years; or a married couple whose joint income exceeds $300,000 for the same period. In the current year, the household should also earn this level of income.
Institutions and companies, such as insurance companies, trusts, banks, employee benefit plans, and other entities, may also be considered as accredited investors; however, the asset requirements are usually higher.
Who Qualifies to be an Accredited Investor?
According to the Securities and Exchange Commission (SEC), in 2010, or 7.4% of households (8.7 million) in the United States qualified as accredited investors based on standards for net worth in the definition of an ‘accredited investor’. Refer to pages 100 to 102 of the Commission’s final rule, which disqualifies bad actors from participating in 506 offerings (available here) in the Economic Analysis section.
The Spectrem Group conducted a study (cited here) in 2011 and found that approximately 8.6 million households in the United States amassed a net worth of $1 million or more; however, this included the value of each home. With the passage of the Dodd-Frank Act in 2010, the definition of an accredited investor was adjusted to include inflation, while excluding home values when calculating wealth. It also redefined requirements for income and net worth for any individual to be deemed ‘accredited’ by the SEC.
Based on recent data published by the Internal Revenue Service in 2009, 3,924,489 individually filed tax returns reflected adjusted gross income of $200,000 or more. Expanded returns reflecting income of $200,000 or more totaled 3,975,288. Since some households most likely did not have a net worth of $1 million, this number would not have accounted for unavoidable fluctuations since 2009, around 8.6 million – (the number of households which would have been unable to qualify since the primary residence had to be excluded, in addition to the households that were unable to qualify based on the value of assets but qualify based on income).