The investor qualifications for the above types of investors are set by the Securities and Exchange Commision (SEC). Why SEC? Because when 2 or more parties come together and structure a deal, you are allocating equity or shares of the new entity which becomes a security per SEC.
Accredited Investors
To be an accredited investor, one of the following criteria must be met. Refer to conditions set forth in the Rule 501 of Regulation D.
- Income: Individual income above $200K or married couple joint income above $300K for the past 2-years with an expectation to earn the same this year.
- Net Worth: Individual or joint net worth > $1MM, excluding the value of the primary residence.
- Professional Certification: Any person holding at least one professional certification, designation, or credential from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status.
- Knowledgeable Employees: Executive officers, directors, trustees, and advisory board members of a private fund, or an employee of a private fund who participates in investment activities of the fund and has been doing so for at least 1 year.
Sophisticated Investors
Sophisticated investors are defined by the SEC as those who “have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” Sophisticated investors are also non-accredited investors, however not all non-accredited investors are sophisticated investors.
Sophisticated investors have fewer investment opportunities than accredited investors. One noteworthy perk is that they can invest in Rule 506(b) offerings. Under this rule, securities may not be sold to more than 35 sophisticated investors, thereby reducing the sheer number of overall investment opportunities available.
These classifications are in place to ensure that there is sophistication on part of the investor to engage with private offerings with an understanding of the risks and ability to weather the potential financial losses.
Accredited investor status is a milestone to achieve to get exposure to more offerings and reach highest levels of investment.
TreasureHome Capital Partners works with both Accredited and non-accredited investors depending on the opportunity in context.
