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

What Is a Non-Accredited Investor?

A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors.

An accredited investor can be a bank or a company but is mainly used to distinguish individuals who are considered financially knowledgeable enough to look after their own investing activities without SEC protection.

The current standard for an individual accredited investor is 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 expectation of the same for the current year.

A non-accredited investor, therefore, is anyone making less than $200,000 annually (less than $300,000 including a spouse) that also has a total net worth of less than $1 million when their primary residence is excluded.

Understanding Non-Accredited Investors

Non-accredited investors make up the bulk of investors in the world. When people speak of retail investors, they often mean non-accredited investors. Basically, this term covers everyone who holds less than $1 million in assets, aside from the value they may have in their house, and earns under $200,000, i.e., the vast majority of Americans. According to a 2023 report from the SEC, accredited investors made up 18% of households in 2022.

The SEC does have the ability to change the definition of accredited investor should inflation and other factors result in too much of the general population meeting the standard. 

On Aug. 26, 2020, the U.S. Securities and Exchange Commission amended the definition of an accredited investor. According to the SEC's press release, "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."

Among other categories, the SEC now defines accredited investors to include the following: individuals who have certain professional certifications, designations, or credentials; individuals who are “knowledgeable employees” of a private fund; and SEC- and state-registered investment advisers.

Non-Accredited Investors and Private Companies

Non-accredited investors are limited in their investment choices for their own safety. After the speculation around the 1929 Crash and the resulting depression, the SEC was created to protect regular people from getting into investments they couldn't afford or understand.

The SEC uses acts and regulations to set out what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency. Private funds, private companies, and hedge funds can do things with investor money that mutual funds cannot 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 regulation 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, which keeps the number of non-accredited investors in a private placement below 35.

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.