An accredited investor is defined under SEC rules as being financially sophisticated. Companies may prefer to sell securities to these investors, since doing so may reduce the reporting obligations of the issuer. This can be a major benefit to the issuer, especially when the alternative is to incur the expense of going public.
The SEC definition of an accredited investor is:
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- A charitable organization, corporation, or partnership with assets exceeding $5 million;
- A director, executive officer, or general partner of the company selling the securities;
- A business in which all the equity owners are accredited investors;
- A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
This definition comes from Rule 501 of the SEC’s Regulation D.
The accredited investor can be of considerable importance when a company is interested in the sale of unregistered securities.