There were not always “accredited” and “sophisticated” investors. At least, those terms were not coined until 1933. Accredited and sophisticated investors are not created equally. In this blog, we’ll break down what accredited and sophisticated investors are, the qualifications of each, and the opportunities and limitations each one holds.
What are Accredited Investors?
Accredited investors are investors that are allowed to participate in unregistered securities offerings, if they meet at least one of the SEC’s requirements on income, net worth, or other factors. These unregistered securities are considered to be inherently risky due to a lack of liquidity and less externally verifiable information about the offering, among other characteristics. Accreditation status is assigned to investors who meet at least one of the following requirements:
- Net worth exceeding $1M, individually or jointly with a spouse, excluding the value of your primary residence
- Have an annual income exceeding $200,000 as an individual, or $300,000 joint income, for the preceding two years
- Be a general partner, executive officer, or director for the company issuing the security
- A private business entity that exceeds $5M in assets, or if all equity owners are accredited
- Hold certain professional certifications, designations, or credentials issued by an accredited educational institution (2020 amendment)
The initial certifications, designations, and credentials that were accepted under the professional certifications delegation include the Series 7, Series 82, and Series 65 FINRA licenses[1]. The SEC reserves the right to add to, remove from, or modify these credentials at any point in the future. To learn more about accredited investors and read about the 2020 amendments, check out our blog titled Are You an Accredited Investor Under the SEC’s Updated Definition?
What are Sophisticated Investors?
A sophisticated investor is a high-net-worth individual who is considered to have extensive market experience and knowledge. The specific definition of a sophisticated investor varies from country to country, but the United States’ dictates sophisticated investors are those who have “sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.”[2]
Some sophisticated investors are considered to be non-accredited on the basis of net worth and other factors, but not all non-accredited investors are sophisticated. Likewise, some accredited investors may also be sophisticated, but not all sophisticated investors are accredited. In other words, sophisticated investors are recognized for their knowledge, but may not meet specific accreditation criteria. Sophisticated investors may have access to some of the same unregistered securities that accredited investors do, but there are limitations in place for participation.
Limitations of Accredited and Sophisticated Investors
The true difference between accredited and sophisticated investors comes from the opportunities and limitations. For example, in certain Regulation D Rule 506(b) offerings, an unlimited amount of accredited investors are able to participate, but each round is limited to 35 non-accredited, sophisticated investors[3]. In Regulation D Rule 506(c), only verified, accredited investors are allowed to participate. For this exemption, accreditation status must be reasonably verified by the issuer, the company providing the security. In Regulation A/A+ offerings, Tier 1 has no investor limits, but Tier 2 subjects sophisticated investors to maximum investment thresholds; contributions up to 10% of their annual income or net worth, whichever is greater. Sophisticated investors may have less access to private market opportunities than accredited investors, but they may have access to opportunities that aren’t available to the average non-accredited investor.
Accredited and non-accredited investors alike may be subject to investment minimums. These minimums can be set by brokers or issuers as a price floor for the security, and can vary greatly.
Am I Accredited, Sophisticated, or Non-Accredited?
Determining your accreditation status is simple. The SEC posted an Investor Bulletin in April 2021 that lists the requirements for accreditation and has a table of example calculations for determining your net worth. If you meet at least one of the SEC’s requirements, you are considered accredited. Brokers or institutions may verify accreditation status when signing up for an investment account. If you do not meet at least one of the SEC’s requirements, you are a non-accredited investor with access to certain opportunities like Regulation Crowdfunding. Sophisticated investor status is not as easily verified. The company or private fund offering the security has to determine if the knowledge and experience qualifies the investor as sophisticated, making it more of a gray area. If you are unsure if you are accredited, sophisticated, or non-accredited, our investor support team may be able to help. Sign up for a MicroVentures account at https://my.microventures.com/signup
[1] https://www.sec.gov/news/press-release/2020-191
[2] https://www.sec.gov/smallbusiness/exemptofferings/rule506b
[3] https://www.sec.gov/smallbusiness/exemptofferings/rule506b
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
