Accredited Investor

What It Is:

An accredited investor is an individual or organization allowed to participate in higher risk investments such as hedge funds, angel investor networks, and some limited partnerships.

How It Works/Example:

Generally, for U.S. individuals to be considered accredited, they must have a net worth of at least one million U.S. dollars or have made at least $200,000 each year for the previous two years.

According to the Securities Act of 1933, a person or entity must meet any of the following criteria to be deemed an accredited investor : 

• A bank, insurance company, registered investment company, business development company, or small business investment company.
• Certain employee benefit plans.
• A charity, corporation, or partnership with assets over $5 million.
• A director, executive officer, or general partner of the issuer.
• A business in which all the equity owners are accredited investors.
• A investor with individual or joint net worth (if the person is married) of over $1 million at the time of purchase.
• An individual with income over $200,000 in each of the last two years or joint income with a spouse exceeding $300,000 (and a reasonable expectation of that same in come in the current year).
• A trust with assets over $5 million (note that the trust cannot be formed simply to acquire the securities offered).
   

Why It Matters:

Many hedge funds, private equity firms, limited partnerships, and equity offerings in private companies are open only to accredited investors. The idea is that only investors of a certain level of sophistication should be able to participate in higher-risk, more complex, and less regulated investments. This level of sophistication is (fortunately or unfortunately) measured by the investor's wealth.