There are two common types of investors when it comes to investing in private companies: accredited and non-accredited investors. While both types of investors have the opportunity to invest in startups, they have clear differentiations when it comes to the type of opportunities they can invest in, the amounts in which they can invest, and in general, may have different risk tolerances as well. In this blog, we’ll explore some key differences between accredited and non-accredited investors and how an investor can tell whether or not they are accredited.

Accredited vs. Non-Accredited Investors

Who are Accredited Investors?

Accredited investors are those who meet specific criteria, as outlined by the Securities and Exchange Commission (SEC). These investors are typically segmented by financial and professional criteria[1].

Financial Criteria

An investor is considered to be accredited if they meet the following financial criteria:

• Holds a net worth over $1 million, excluding their primary residence (individually, or combined with spouse)
• Has an annual salary greater than $200k annually ($300k annually if married), has received this salary in each of the prior two years, and generally expects to continue with an equal or greater salary in the future

Professional Criteria

If an investor does not meet the financial criteria as outlined in the previous section, they may still be considered to be accredited if they meet the following professional criteria:

• Holds specific securities licenses including the Series 7 (General Securities Representative License), the Series 65 (Investment Adviser Representative License), and/or the Series 82 (Private Securities Offerings Representative License)
• Is a director, executive officer, or general partner (GP) of the company selling the securities (or of a GP of that company)
• Represents a “family client” or a “family office” that qualifies as an accredited investor
• Is a “Knowledgeable Employee” of a private fund, for investments in a private fund

Investment Opportunities for Accredited Investors

Accredited investors may have many investment opportunities available from which they can choose whether those investments are right for them and their portfolios. Some of the securities regulations that accredited investors can invest in include:

Regulation D 506(b) & 506(c)

Regulation D (Reg D) has two securities exemptions: 506(b) and 506(c). These exemptions are a safe harbor under the SEC’s Rule 506 which allows companies to raise an unlimited amount of capital from accredited investors without registering the securities with the SEC. Accredited investors can invest in either exemption of Reg D[2].

Regulation Crowdfunding

Regulation Crowdfunding (Reg CF) was enabled by the JOBS Act of 2015 which allowed the “everyday investor” to invest in startups. Startups raising under Reg CF can raise up to $5M in a 12-month period. Accredited investors can invest in Reg CF opportunities[3].

Regulation A

Regulation A (Reg A) investment opportunities have two tiers: Tier 1 and Tier 2. Tier 1 of Reg A allows a startup to raise up to $20M in a public offering. Tier 2 of Reg A allows a startup to raise up to $75M in a public offering. Accredited investors can invest in either tier of Reg A[4].

How to Find Investment Opportunities

Accredited investors can find investment opportunities via online platforms, like MicroVentures. The online platform asks several questions when an account is set up to help verify the investor’s accreditation status and then presents different investment opportunities across various industries and growth stages. MicroVentures offers various types of investment opportunities to investors on our platform.

Limitations of Accredited Investors

While accredited investors have access to more investment opportunities than non-accredited investors, they still can face specific limitations. For example, accredited investors may be subject to investment minimums that are set by brokers or issuers. For example on MicroVentures, many of our accredited opportunities have investment minimums that can range from $5k-$15k. Investors seeking to invest lower amounts than the minimum may not be able to make that investment. Each broker and issuer typically has the choice to set their own investment minimums.

Who are Non-Accredited Investors?

In the simplest terms, non-accredited investors are those who do not meet the accreditation criteria outlined by the SEC. However, there are technically two subcategories under “non-accredited investors”. A standard non-accredited investor could be described as the “everyday person”. Anyone who does not have an extended knowledge of private market investing is considered a non-accredited investor. Sophisticated Investors are non-accredited investors who have sufficient knowledge and experience in financial and business matters to evaluate the investment. However, they do not meet the knowledge or financial criteria for accreditation.

Investment Opportunities for Non-Accredited Investors

While non-accredited investors may not have access to as many investment opportunities as Accredited Investors, they still could have opportunities to invest in startups through various securities regulations.

Regulation Crowdfunding

With Reg CF, any investors can participate, but non-accredited and sophisticated investors are subject to maximum investment thresholds based on net worth and annual income[5].

• If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth
• If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of your annual income or net worth, whichever is greater, but not to exceed $124,000

Regulation A

Under Reg A, sophisticated investors may have the opportunity to participate. Under Tier 2 of Reg A, sophisticated investors are limited by maximum investment thresholds. For example, a sophisticated investor is only able to contribute up to 10% of their annual income or net worth, whichever is greater[6].

Regulation D 506(b)

For Reg D 506(b), up to 35 non-accredited, sophisticated investors can participate in an offering. The issuer offering the security or the broker facilitating the transaction is expected to verify accreditation status and keep track of the number of non-accredited, sophisticated investors participating in the round[7].

How to Find Investment Opportunities

For non-accredited investors and Sophisticated Investors, many find investment opportunities on online platforms like MicroVentures. MicroVentures opens up the world of early-stage startup investing to non-accredited investors through our Regulation Crowdfunding offerings.

Final Thoughts

While accredited and non-accredited investors both have specific criteria that determine which category they fall into, both can be connected by a common theme: investing in startups. MicroVentures aims to provide a selection of investment opportunities that both accredited, non-accredited, and sophisticated investors are able to access and potentially add to their portfolios.

Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!

Want to learn more about key considerations for investors? Check out the following MicroVentures blogs to learn more:

• Investing in Crowdfunding as an Accredited Investor
• Unlocking New Opportunities: Investing in Alternatives
• Regulation Crowdfunding: Empowering the Next Generation of Investors
• Invest in Startups without Being Accredited

 

[1] https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/accredited-investor

[2] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-31

[3] https://www.sec.gov/resources-for-investors/investor-alerts-bulletins/ib_crowdfunding

[4] https://www.investor.gov/introduction-investing/investing-basics/glossary/regulation

[5] https://www.sec.gov/resources-for-investors/investor-alerts-bulletins/ib_crowdfunding

[6] https://www.sec.gov/files/review-definition-accredited-investor-2023.pdf\

[7] https://carta.com/learn/private-funds/regulations/regulation-d/506b-vs-506c/

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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.