What's the deal with being an accredited investor? Why does the SEC even have that designation?
I've read the arguments on the benefits for startups to pick accredited angel investors. But what's the deal about it from the SEC's standout? What did the SEC have to gain from even creating this designation?
Funding Angel Investors Angel Investors
2 Answers
For those needing a definition, here is a Wikipedia entry on accredited investors. This quote is of interest "investors permitted to invest in certain types of higher risk investments including seed money, limited partnerships, hedge funds, private placements, and angel investor networks".
Since the investments are risky, due to limited information available (compared to say publicly traded stocks and funds), the reason is simple - to protect individuals who are not professionals from risking and loosing money (say life's savings) they really are not in a position to risk/loose. Note that primary residence doesn't count towards the minimum $1 million in in assets.
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This. Plus startups tend not to raise money from non-accredited investors. In most cases those investors want to be way too involved in your business -- as they aren't playing a numbers game like their accredited counterparts. – Nishank Khanna 10 years ago
An accredited investor is someone who satisfies at least one of these conditions:
- $200,000 per year income in the last two years ($300K joint with your spouse if you're a married couple).
- Net worth of $1 million. Excluding the value of your primary residence.
Some companies can also qualify as accredited investors, but the minimum-asset requirements are higher for them.
The reason for being accredited is simple: you assess an investment without a prospectus.
If you're not an accredited investor, the person taking your funds has a lot more legal paperwork to go through to ensure you understand the risks involved.
