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What Is A Non-Accredited Investor?
A non-accredited investor is an individual who doesn’t fall under the SEC’s criteria for being an accredited investor.
But wait...what is an accredited investor?
An accredited investor is a category of individuals or institutional accredited investors who can invest in the private capital markets via venture capital, a hedge fund, and other investments that tend to be less regulated by the SEC.
The SEC’s criteria for individuals to qualify as accredited investors are:
Net worth should be more than $1 million (alone or together with a spouse), not including the value of their primary residence, or
Income should be $200,000 (or $300,000 combined income with a spouse) in the past two years (with the expectation of meeting the same income threshold for the current year), or
According to a November 2020 amendment, a sophisticated investor whom the SEC deems as a “knowledgeable employee” of a private fund or its affiliated manager; and SEC- and state-registered investment advisers and investors who have certain qualifications and certifications can also qualify as accredited investors.
So, in effect, according to the non accredited investor definition we mentioned, a non-accredited investor would be someone who:
Had an income of less than $200,000 a year for the last two fiscal years ($300,000 if joint income is considered);
Has a net worth of less than $1 million when their primary residence is excluded; and
Does not meet any of the other potential categories for accredited investors.
Why do these guidelines exist?
Most non-accredited investors are regular, individual investors who want to invest part of their money into a portfolio of assets. However, as they lack the financial sophistication and knowledge to evaluate the merits and risks of a prospective investment, the SEC has placed the net-worth and income restrictions in place to protect them.
These guidelines protect an unaccredited investor from investments that can potentially harm their interests if they can’t understand the higher risks associated with these investments or are financially incapable of absorbing the financial fallout of an investment gone wrong.
However, non-accredited investors can always move to an accredited investor status, provided that they meet the SEC’s guidelines.
Accredited vs. non-accredited investors
To better understand the differences between non-accredited and accredited investors, refer to this table:
|Criteria||Accredited investor||Non accredited investor|
|Net worth||More than $1 million, not including the value of their primary residence||Below $1 million|
|Income||$200,000 (or $300,000 combined income with a spouse) in the past two years||Earned less than $200,000 in the past two years|
|Qualifications||Individuals whom the SEC deems as “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisers and investors who have certain qualifications and certifications.||Not qualified as an investment adviser and does not possess the SEC-mandated qualifications and certifications.|
|Investment options||Can invest in a range of assets - many of which have low regulations (including many privately-traded assets)||Can access fewer investment options with more regulations (usually publicly-traded assets)|
Important Regulations For Non-Accredited Investors
When looking at SEC regulations for non-accredited investors, we need to consider three SEC amendments from 2020.
1. Rule 506(d) of Regulation D (Reg D) in Section 4(a)(2) of the Securities law states that a private company raising capital through a private placement or private offering “can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors.”
However, as a Rule 506 offering, issuers can raise capital from no more than 35 non-accredited investors. Each of them needs to have sufficient knowledge and experience to evaluate the investment's merits and risks.
2. Regulation A or Reg A+, an amendment to the JOBS Act, describes an exemption from registration for public offerings by small companies raising up to $75 million.
However, Regulation A sets limits on how much a non-accredited investor can invest in an exempt offering:
If their annual income or net worth is less than $107,000, they can invest up to $2,200 or 5% of their income or net worth, whichever is greater
If their annual income or net worth is greater than $107,000, they can invest up to 10% of their either their net worth or their annual income, whichever is greater
3. Regulation CF or Regulation Crowdfunding lets companies raise sums up to $5 million through “mini IPO” or Initial Public Offerings within 12 months.
While it places no limits on the amount of money an accredited investor can put in here, non-accredited investors have some limitations.
Earlier, the investment limit calculation for non-accredited investors was based on the ‘lesser’ of their net worth or annual income.
This has now changed to the ‘greater’ of the two.
For example, let’s say a non-accredited investor has an annual income of $50,000 and a net worth of $120,000. They’d now be allowed to invest 10% of $120,000, i.e. $12,000.
7 Investment Options For Non-Accredited Investors
While non-accredited investors have fewer options to invest than accredited investors, there’s still a ton of options to choose from. They can put money into various savings and retirement accounts, a mutual fund, a crowdfunding platform, or even some alternative assets.
Here are some more examples of what non-accredited investors can invest in:
The stock market is a popular investment option for non-accredited investors to invest their money. When you purchase a stock, you’re buying partial ownership in that company, and the value of your stock will appreciate as the company’s value appreciates.
Don’t know where to start?
Begin your stock market journey with Public, a stock investing app specially designed for beginners.
2. Mutual fund
A mutual fund is a pooled fund where a fund manager invests money into stocks and bonds on your behalf. As mutual funds are actively managed, they usually have high fees and are relatively illiquid.
If you’re looking for a good way to get started with mutual funds, consider Firstrade. It’s a ‘no-cost trading’ app that makes it easy for non-accredited investors to invest in mutual funds.
3. Real estate
Real estate can be a safe haven as it's an investment that’s relatively shielded from broader stock market trends. Additionally, a real estate project has the potential to appreciate steadily and generate passive income.
However, retail investors often have to think twice about real estate investing (especially in a commercial property) because it’s expensive to purchase and usually involves tons of due diligence.
Real Estate Investment Trusts (REITs) pool money from multiple investors (like a mutual fund) to buy and manage properties, making investing in commercial real estate accessible. This is called real estate crowdfunding.
And if you’re looking for a real estate crowdfunding platform, consider DiversyFund.
This REIT has investment minimums as low as $500, and you earn through monthly dividends and see the value of your investment appreciate as the property’s value appreciates.
Crowdlending is a way for small businesses to raise money without having to approach banks. They invite private investors to lend them money in return for a steady interest rate on the loan installments.
Yieldstreet is an easy way for non-accredited investors to invest in a portfolio of debt-backed investments that span fields like art, real estate crowdfunding, and marine finance. You just need a minimum of $5,000 to invest in their Prism Fund.
5. Private equity
Private equity is a method for early-stage, high-growth startups to raise capital from investors quickly. Since these companies are not publicly listed, a private equity investment is usually a risky investment opportunity, requiring a ton of capital.
This has resulted in equity crowdfunding often being out of reach for most non accredited investors. However, with Republic, anyone can become an equity owner in high-potential startups and businesses with just $10.
Gold is another popular investment asset that’s relatively insulated from most market fluctuations. You can invest in gold through bullion, pooled funds, futures, etc., and get a steady return in time.
However, as with real estate, investing in gold can be too expensive for most non accredited investors.
Luckily, with Vaulted, it doesn’t have to be.
With a $1 minimum investment, it’s a gold-investment app that lets you easily buy and sell 99.9% pure gold.
7. P2P loans
Peer-to-peer lending lets individuals borrow money from private investors, who earn interest with each repayment. This is a more flexible form of raising capital for small borrowers and a reliable source of passive income for the lenders (investors).
You, too, can lend to someone by signing up for Groundfloor. Loans on this P2P platform are backed by real estate investment, and they can potentially generate 10% returns annually.
While accredited investors have more investment options than non-accredited ones, there are still plenty of investment opportunities available for non-accredited investors.
And with new investment platforms like the ones we mentioned here, every potential investor now has tons of opportunities to diversify their portfolio and earn steady returns easily.
If you want to learn more about these investment opportunities and find out what options suit your needs best, check out Moneymade. It has data on each platform’s risks, potential returns, fees, and more - helping you make an informed investment decision!