Accredited vs. Non-Accredited Investors: What Is the Difference?

Key Takeaways

• Non-accredited investors are individuals with an annual income below $200,000 (or $300,000 combined with a spouse) and a net worth under $1 million (excluding their primary residence).
• Investment opportunities for non-accredited investors include crowdfunding, REITs, and mutual funds. They generally do not have access to hedge funds or private equity funds, which are reserved for accredited investors.
• Non-accredited investors face challenges such as limited investment options, and potential gaps in financial knowledge.
• The distinction between accredited and non-accredited investors is defined by the Securities and Exchange Commission (SEC) based on financial thresholds, directly impacting the types of investment opportunities available to each group.

The distinction between accredited and non-accredited investors isn’t just a matter of semantics. The Securities and Exchange Commission (SEC) defines the two categories based on income and net worth, which generally directly impacts the types of investment opportunities available to each group. 

This informational guide explores the differences between both groups as far as available investment options, and the challenges and risks of non-accredited individuals.

What Is a Non-Accredited Investor?

The Securities and Exchange Commission (SEC) defines non-accredited investors as individuals who don’t meet the income or net worth requirements necessary to qualify as accredited investors. 

This includes individuals with: 

• An annual income of less than $200,000 (or $300,000 combined income with a spouse).
• A net worth of less than $1 million, excluding the value of their primary residence. 

According to SEC data from 2022, those with accredited investor status comprised only about 18% of U.S. households.

Correspondingly, non-accredited investors make up a significant portion of the investing public.

Non-accredited investors are often referred to as retail investors and are subject to more stringent regulations designed to protect them from high-risk investments that they may not fully understand or afford. 

Accredited vs. Non-Accredited Investors: Key Differences

The differences between non-accredited investors and their accredited counterparts hinge primarily on financial thresholds established by the SEC, as outlined in the table below:

Investment Opportunities for Non-Accredited Investors

Despite regulatory limitations, non-accredited investors can access some investment avenues to help them grow their wealth.

Crowdfunding Platforms

The JOBS Act, introduced in 2016, permits non-accredited investors to participate in equity crowdfunding. This allows individuals to invest in startups and small businesses with relatively low minimum investment amounts.

Crowdfunding platforms, one of which is StartEngine, provide opportunities for non-accredited investors to explore funding early-stage companies or specific projects.

Real Estate Investment Trusts (REITs)

REITs provide a way for non-accredited individuals to invest in real estate with smaller amounts of capital. Generally, these trusts pool resources from multiple investors to acquire and manage income-generating properties. 

By law, REITs must distribute at least 90% of their taxable income as dividends to shareholders. Additionally, REITs may offer investors access to professional property management and diversification within the real estate sector. 

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are popular investment vehicles for non-accredited investors, offering diversified portfolios and regulatory oversight. These instruments allow individuals to invest without requiring extensive market expertise.

They also provide transparency regarding fees and performance metrics. It is important to note that ETFs trade throughout the day like stocks, whereas mutual funds are priced and traded only once daily after the market closes.

Cryptocurrency and Blockchain

While cryptocurrencies like Bitcoin have experienced notable price increases in the past, their value is highly speculative and subject to fluctuations. Investors can purchase cryptocurrencies through platforms such as Coinbase, Binance, and Kraken, often with relatively small initial investments. However, it is important to carefully research and understand the risks associated with cryptocurrency investments before proceeding. 

Socially Responsible Investments (SRI)

Non-accredited investors can explore socially responsible investing (SRI), which seeks to align financial returns with social and environmental objectives.

Examples of SRI include community investing, which directs funds toward projects benefiting underserved populations, and mutual funds or ETFs that prioritize companies adhering to specific ethical, environmental, or social standards. Notable examples of such funds include the Vanguard ESG U.S. Stock ETF and the iShares Global Clean Energy ETF.

Regulations Impacting Non-Accredited Investors

Some of the key regulations that both impact and protect non-accredited investors include. 

Regulation Crowdfunding (Reg CF)

According to Reg CF, the investment limits are based on both annual income and net worth and there are tiered limits:

• If either your annual income or net worth is less than $124,000*, you can invest the greater of $2,500 or 5% of the lesser of your annual income or net worth.
• If both your annual income and net worth are $124,000 or more, you can invest up to 10% of the lesser of your annual income or net worth, up to a maximum of $124,000*.

*It's important to note that these thresholds are subject to periodic adjustments for inflation, and the figures provided are accurate as of 2024.

Regulation D

Regulation D provides exemptions that allow companies to raise capital without registering with the SEC. This balances accessibility for non-accredited investors while ensuring they receive adequate information about their investments.

Key points include: 

• Rule 506(b) This rule allows companies to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements.   
• Rule 504 This rule allows companies to raise up to $10 million within a 12-month period from an unlimited number of investors, including non-accredited investors. However, offerings under Rule 504 must comply with applicable state securities laws.

State Regulations (Blue Sky Laws)

In addition to federal securities laws, issuers of securities must also comply with state securities laws, commonly known as "blue sky laws." These laws can impose additional requirements on offerings made within a particular state, adding complexity to the offering process.

While these laws vary from state to state, they generally aim to protect investors by requiring the registration of securities offerings or the use of an applicable exemption. These laws often require issuers to disclose information about the offering and the company itself, though the specific requirements vary.

Note: While the Uniform Securities Act of 1956 served as a model for many state securities laws, many states have since adopted variations of the Uniform Securities Act of 2002. This means that while there are similarities between state laws, there are also important differences that must be considered.

Challenges and Risks Non-Accredited Investors Face

Besides regulatory limitations and limited access to certain investment avenues, non-accredited investors also face the following hurdles:

Lack of Financial Sophistication

The assumption underlying the SEC’s regulations is that non-accredited investors may lack the professional knowledge required to understand complex investment products. This lack of knowledge can expose them to greater risks if they venture into unsuitable investments. 

However, it's important to note that if you hold a Series 7, Series 65, and Series 82 licence, you are considered an accredited investor, even if you don't meet the income or net worth requirements. This is because the license itself is seen as evidence of your financial knowledge and ability to assess investment risks.

Market Volatility and Risk Exposure

Generally, non-accredited investors are more vulnerable to market volatility due to their limited capital and investment options.

As such, with a concentration on traditional assets like publicly traded stocks, bonds, and mutual funds, they may experience large fluctuations in their portfolio values during economic downturns. 

Potential for Fraud or Scams

The regulatory environment designed to protect investors who aren’t accredited doesn’t completely eliminate the risk of fraud. Unscrupulous operations may target this category of investors with high-pressure sales tactics or misleading information that promises unrealistic returns. 

Understanding Non-Accredited Investor Opportunities

General consideration for non-accredited investors that may help them better understand their investment options:

• Educating Themselves: Engaging in financial education through reputable sources and literature to understand various investment vehicles and market trends.
• Diversifying Investments: Allocating funds across different asset classes, such as stocks, bonds, and alternative investments, to spread risk.
• Utilizing Online Platforms: Understanding investment platforms that offer access to opportunities suitable for non-accredited investors.   
• Consulting Financial Professionals: Professional financial advice may help align investment strategies with individual goals and risk tolerance.
• Starting Modestly: Beginning with small investments is a prudent approach for new investors to gain experience and confidence.

Start Investing With StartEngine

The distinction between accredited and non-accredited investors is based on income and net worth criteria established by the SEC. While non-accredited investors face certain limitations, they also have access to diverse and regulated opportunities such as mutual funds, REITs, crowdfunding, and socially responsible investments.

However, it is crucial to approach these opportunities with a clear understanding of the risks involved. By educating themselves, consulting financial professionals, and leveraging regulated platforms, non-accredited investors can make informed decisions and work towards achieving their financial goals. Always remember that investing requires careful planning, diversification, and due diligence to maximize potential returns while managing risks.

At StartEngine, we provide opportunities for both accredited and non-accredited individuals to invest in startups. Whether you’re interested in exploring new investment opportunities or looking for ways to diversify your portfolio, StartEngine offers resources that may help you make informed decisions. 

Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial, legal, or investment advice. Investing involves risks, including the potential loss of principal. Non-accredited investors are encouraged to conduct thorough research, seek professional financial advice, and carefully evaluate their risk tolerance before making any investment decisions. The mention of specific investment opportunities or platforms does not constitute an endorsement or recommendation. All investments should comply with applicable SEC, FINRA, and state regulations.

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