# Non-Accredited Investor: Definition, SEC Rules, vs. Accredited

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> **Definition**
>
> A non-accredited investor is typically a retail investor or someone who doesn't meet the financial criteria of an accredited investor as set by the SEC.

## What Is a Non-Accredited Investor?

A non-accredited investor is an investor who does not meet the income or net worth requirements set out by the [Securities and Exchange Commission (SEC)](https://www.investopedia.com/terms/s/sec.asp). This term applies to the majority of investors who participate in the market, who are commonly referred to as retail investors. Non-accredited investors are contrasted with what the SEC calls accredited investors.  

### Key Takeaways

*   A non-accredited investor is an investor who does not meet the income or net worth requirements of the SEC.
*   A non-accredited investor makes less than $200,000 annually ($300,000 including a spouse) with a total net worth of less than $1 million when their primary residence is excluded. 
*   The SEC regulates what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency.

## Understanding Non-Accredited Investors

As noted above, non-accredited investors are commonly referred to as [retail investors](https://www.investopedia.com/terms/r/retailinvestor.asp). Although it isn't easy to pinpoint an exact number, there are significantly more non-accredited investors in the United States because of the strict criteria that define accredited investors. A non-accredited investor is anyone with:

*   Annual income of less than $200,000 or $300,000 if combined with a spouse/partner
*   A [net worth](https://www.investopedia.com/terms/n/networth.asp) of less than $1 million (excluding their primary residence)

Non-accredited investors are limited to the types of investments from which they can choose. Regulators put these restrictions in place to protect them from excessive risk and large financial losses that may result from complex financial instruments they may not understand. As such, the SEC uses acts and regulations to set out what these investors can invest in and what documentation and [transparency](https://www.investopedia.com/terms/t/transparency.asp) investment companies need to provide.

The majority of investment options available to non-accredited investors are publicly traded, including stocks, bonds, mutual funds, and [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp). They can also invest in alternative investment options, such as r[eal estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp), real estate, and commodities.  

> **Important**
>
> The SEC was created after the stock market crash of 1929 and the Great Depression to protect regular people from getting into investments they couldn't afford or understand.

## Non-Accredited vs. Accredited Investors

An [accredited investor](https://www.investopedia.com/terms/a/accreditedinvestor.asp) can be an entity like a bank or company or an individual who doesn't need SEC protections for their investments. This investor has a net worth exceeding $1 million (excluding their primary home) and an annual income exceeding $200,000 (or $300,000 with a spouse/partner) for each of the past two years with the expectation of the same for this year.

The SEC now defines accredited investors to include the following:

*   Individuals with certain professional certifications, [designations](https://www.investopedia.com/articles/financialcareers/07/different_designations.asp), or credentials
*   Individuals who are “knowledgeable employees” of a private fund
*   SEC- and state-registered investment advisors

Keep in mind that the SEC can change the definition of an accredited investor should [inflation](https://www.investopedia.com/terms/i/inflation.asp) and other factors result in too much of the general population meeting the standard. This was the case on August 26, 2020, when the SEC said:

> "The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth. The amendments also expand the list of entities that may qualify as accredited investors, including by allowing any entity that meets an investments test to qualify."  

> **Fast Fact**
>
> According to a 2023 report from the SEC, accredited investors made up 18% of households in 2022.

## Non-Accredited Investors and Private Companies

Private funds, private companies, and hedge funds can do things with investor money that [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) (and other investments) can't do simply because they deal primarily with accredited investors. The SEC assumes that all parties involved know the risks and rewards involved, so they have a lighter regulatory touch where these funds are concerned.

That said, these funds must pay close attention to their compliance and make sure their investor counts stay within the rules because they can lose their regulatory status. For some types of private investment, they are only allowed non-accredited investors when they are employees or fit a specific exemption.

Other funds and companies can have unrelated non-accredited investors, but they must keep the number below a certain level. This is the case with [Regulation D](https://www.investopedia.com/terms/r/regulationd.asp), which keeps the number of non-accredited investors in a [private placement](https://www.investopedia.com/terms/p/privateplacement.asp) below 35.

## What Is the Difference Between Accredited and Non-Accredited Investors?

The difference between accredited and non-accredited investors is determined by the SEC, which categorizes investors based on net worth and salary.

Accredited investors have a net worth of more than $1 million excluding the value of their primary residence and an income of more than $200,000 annually (or $300,000 combined income with a spouse) for each of the past two years with the same expected for the current year. Anyone who doesn't meet these requirements is a non-accredited investor.

## Why Do Investors Need to Be Accredited?

Investors need to be accredited so that they can invest in riskier assets. The goal is to protect non-accredited investors. It is assumed that accredited investors have enough financial expertise to analyze the risks and rewards of a riskier investment or at least the wealth to absorb a significant loss.

## How Can Non-Accredited Investors Invest in Private Companies?

Non-accredited investors can invest in private companies through equity crowdfunding. This is so because the amount needed to invest is usually very small as equity crowdfunding seeks to pool the investments from many investors.

## Can I Invest in a Hedge Fund if I'm a Non-Accredited Investor?

You generally can't invest in a hedge fund as a non-accredited investor. Hedge funds are sophisticated risky investments that may not be as transparent as other investments, which is why they're only open to accredited investors. This means they are prone to large losses, which the average investor normally can't sustain.

There are indirect ways of investing in hedge funds, though. The companies that operate hedge funds may be publicly traded, which means you can buy and sell their shares. You can also purchase shares in mutual funds that invest in hedge funds.

## The Bottom Line

The SEC's classification of investors into accredited and non-accredited is intended to protect investors who have lower net worths and salaries, and those who may not understand all types of investments; particularly riskier ones. Accredited investors may be able to take more risks simply because they have more money.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[Accredited Investor](https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor)."
>     
> 2.  U.S. Securities and Exchange Commission. "[SEC Modernizes the Accredited Investor Definition](https://www.sec.gov/news/press-release/2020-191)."
>     
> 3.  U.S. Securities and Exchange Commission. "[Review of the 'Accredited Investor' Definition Under the Dodd-Frank Act](https://www.sec.gov/files/review-definition-accredited-investor-2023.pdf)." Page 26.
>     
> 4.  U.S. Securities and Exchange Commission. "[Private Placements - Rule 506(b)](https://www.sec.gov/education/smallbusiness/exemptofferings/rule506b)."