Investor Types

An accredited investor is an individual or business entity authorized to trade securities that may not be registered with financial regulators. These investors qualify for such privileges by meeting specific criteria related to their financial status or professional experience. Criteria for accredited investors include having a net worth exceeding $1 million (excluding the primary residence), either individually or jointly with a spouse or partner; earning an annual income above $200,000 individually or $300,000 jointly in the last two years, with the expectation of the same income level in the current year; holding professional securities licenses such as Series 7, Series 65, or Series 82; being a director, executive officer, or general partner of the company issuing the securities or a general partner of that company; being a “family client” of a qualifying “family office”; or being a “knowledgeable employee” of a private fund for investment purposes in that fund.

A non-accredited investor is someone who does not meet the net worth or income criteria set by the SEC. To safeguard these investors, the SEC imposes limitations on the types of investments they can make, such as hedge funds and private equity. These restrictions are designed to protect non-accredited investors from potentially risky financial ventures. Additionally, the investment options available to non-accredited investors come with increased disclosure and documentation requirements.

A sophisticated investor is typically characterized by substantial investment knowledge and business acumen, coupled with a high net worth that enables them to engage in high-risk investment opportunities. These investors not only have significant financial resources but also possess a deep understanding of financial markets.

The term "sophisticated investor" doesn't have a universal definition and can vary depending on the country or specific legal context. For instance, in the U.S., the Securities and Exchange Commission (SEC) uses the term "accredited investor" to denote individuals who meet certain financial thresholds, such as an annual income of at least $200,000 over the past two years, or $300,000 jointly with a spouse. Additionally, an accredited investor can be a household with assets exceeding $1 million, excluding the primary residence, or a financial institution with substantial assets, such as banks or investment firms with over $5 million in assets.