Meeting the requirements to be an accredited investor in the United States carries some major advantages—most notably the ability to invest in projects non-accredited investors cannot. Depending on your specific financial situation, however, there may be pitfalls as well.
Let's start at the beginning.
What Is An Accredited Investor?
To meet the definition for 'accredited investor', natural persons (entities have different criteria) generally meet one of the following two criteria.
- Possess over $1 million in net worth, either alone or jointly with their spouse, not including the value of their primary residence; or
- Earn $200,000 (or $300,000 with a spouse) for the last two consecutive years, and expect the same level of income for the current year.
It’s interesting to note, however, that as of 2016, around ninety percent of accredited investors achieve that status through net worth alone.
How Many Accredited Investors Are In The U.S.?
The minimum net worth or income required to qualify has not changed in many years, so the number of accredited investors in the U.S. has risen steadily over time. By SEC estimates, there were 1.51 million such households in 1983, but 12.41 million households in 2013. The website DQYDJ used Federal Reserve SCF microdata to estimate about the same number (12.41 million) in 2016, but they calculated only 10.1 million in 2013, so it's fair to say the number is still increasing. (At the time of writing, there was no post-2013 data estimate available direct from the SEC.)
One might guess that as of mid-2018, there are somewhere between 12.5 million and 13.5 million accredited investor households in the United States.
What Are The Pros And Cons To Being An Accredited Investor?
The main benefit to being an accredited investor comes in the ability to invest in private business deals that have less SEC scrutiny because they are not sold to the general public. These are often startups or relatively new businesses, which means both the risk and reward of investing in them is higher than with better-regulated companies. For savvy investors who can qualify as accredited investor, there is a huge amount of potential wealth generation here.
However, not everyone who meets the numerical qualifications can be described as a savvy investor. As then-SEC Commissioner Luis A. Aguilar said in a 2014 report, it may now be too easy for people with no investment experience to meet the requirements. The regulation's initial purpose was to make sure only people with plenty of money to spare would be able to invest in riskier ventures; Aguilar used examples of a widow with a $1 million inheritance or a single parent with a $205,000 income as vulnerable and no longer sufficiently protected by the regulation's minimums. They technically have the finances to invest in a startup, but not the savvy to know what investments are good, nor the wealth to absorb losses (which are all the more likely if they're targeted by predators looking for investment in a 'startup').
Last year, discussions about tightening the requirements to be an accredited investor took place. Earlier this year, the Motley Fool reported the requirements may in fact be loosened in the coming years. Neither change has taken place yet; if any changes do occur, the number of accredited investors—and the amount of overall investment in the startup market—could change dramatically.
In the meantime, remember that most private, generally solicited deals will require verification of accredited investors status.