Non-Accredited Investor: Definition, Rules, and What They Can Invest In

What is a non-accredited investor?

A non-accredited investor is a retail investor who does not meet the Securities and Exchange Commission’s (SEC) financial thresholds for accredited status. Most individual investors fall into this category. The SEC limits access to certain investments for non-accredited investors to reduce the risk of large losses from complex or illiquid offerings.

Key takeaways

• Non-accredited investors do not meet the SEC’s income or net-worth thresholds for accredited investors.
• Typical criteria: annual income under $200,000 (or under $300,000 combined with a spouse) and net worth under $1 million (excluding primary residence).
• Non-accredited investors are generally limited to publicly traded investments or specially structured offerings; private investments often require accredited status or rely on exemptions.

SEC criteria: who is non-accredited versus accredited

Non-accredited investor (typical criteria)
* Annual individual income below $200,000 (or below $300,000 combined with a spouse/partner).
* Net worth under $1,000,000, excluding the value of the primary residence.

Accredited investor (typical criteria and additions)
* Net worth of more than $1,000,000 (excluding primary residence), or
* Annual income exceeding $200,000 (or $300,000 with a spouse) for the past two years with reasonable expectation of the same this year.
* The SEC also recognizes professional qualifications, certain certifications or credentials, “knowledgeable employees” of private funds, and certain registered entities as accredited.

Note: The SEC can revise these tests (for example, to account for inflation) and has expanded the definition to include measures of professional knowledge and certain entities.

What non-accredited investors can and cannot invest in

Common, widely available options:
* Publicly traded stocks, bonds, ETFs, and mutual funds.
* Some alternative investments like publicly listed REITs and commodities.

Restricted or limited options:
* Many private placements, hedge funds, and certain private equity deals are generally open only to accredited investors.
* When non-accredited investors are allowed in private offerings, the SEC imposes limits and disclosure requirements to protect them.

Accessing private companies and private funds

• Equity crowdfunding: A primary route for non-accredited investors to invest in private companies. Crowdfunding platforms pool many small investments and operate under SEC rules that allow broader participation.
• Private placements and Regulation D: Some private offerings may accept a limited number of non-accredited investors. Under certain Rule 506(b) offerings, the number of non-accredited investors is capped (for example, at 35), and the issuer must provide extensive disclosure if non-accredited investors participate.
• Employee exemptions: Employees of a private company may be eligible to invest under specific exemptions even if they are non-accredited.

Hedge funds and other high-risk vehicles

• Hedge funds and many private funds typically restrict investment to accredited investors because of their complexity, leverage, and potential for large losses.
• Indirect exposure: Non-accredited investors can gain indirect exposure by buying shares of publicly traded companies that operate hedge funds or by investing in mutual funds that allocate to hedge-fund strategies.

Why these distinctions exist

The SEC’s investor classification aims to protect less wealthy or less financially sophisticated investors from high-risk, illiquid, or opaque investments they may not fully understand or be able to absorb losses from. Accredited investors are presumed to have greater financial resilience or sophistication, which allows broader access to private markets.

Bottom line

Non-accredited investors have broad access to public markets and certain alternative investments, but are limited from many private placements and hedge funds to protect them from excessive risk. Equity crowdfunding and specific exemptions provide some avenues into private companies, while accredited status (or meeting professional-knowledge criteria) expands access to higher-risk, private-market opportunities.