Beyond the Jargon: What defines an "accredited" or "sophisticated" investor?
Updated: Mar 6, 2021
If you're finding yourself confused by much of the investor jargon out there, you aren't alone. As someone with a professional background in systems and technology, when I first came across the term "accredited" investor I was thinking this was some type of training and certification one could apply for and achieve a certain designation. Ha! With relentless pursuit of education of our investors in mind, let's explore the terms "accredited" and "sophisticated" a little deeper with legal context in mind.
What defines an accredited investor?
The SEC (Securities And Exchange Commission) defines an accredited investor as someone whose income has been at least $200k a year ($300k for joint income households) for each of the last two years and expects (reasonably) to have the same income the coming year. If this criteria isn’t met, the second option is to have a net worth of at least $1M, excluding a primary residence regardless of income. One needs to meet one of these classifications to be filed under this bucket.
What does this mean for you as an investor? Being an "accredited" investor may open or expand your possibilities to certain deals under a specific structure as governed by the SEC. If you don't happen to meet this criteria at the moment, we will work to find a fitting deal that may work for you given the guidelines enforced by the SEC.
What's the point? What does this designation exist?
This classification was created by the SEC as a measure to protect new or inexperienced investors from getting into riskier investments and not being able to weather any potential future losses should that occur.
What is a sophisticated investor?
In 2016 the government passed Title III of the Jobs Act, which opened up some of these investment opportunities to non-accredited investors under certain conditions. What this means is that some investments can accept non-accredited investors, but the investor needs to have sufficient experience and knowledge to be able to evaluate the risks of the investment. This classification is known as a sophisticated investor.
I'd like to learn more, now what?
We hope this brief overview has been helpful. Set up some time to discuss your goals and personal situation 1:1 in a free consultation here. We're happy to help!
To your success,
Founder and CEO
Redline Equity, LLC