In a previous post, I used the term “accredited investor.” You may have wondered if this designation has something to do with an exam-based certification; it’s actually a very specific definition for what could be casually referred to as a “high-net-worth individual.”
An individual can qualify as accredited investors if he or she 1) makes over $200,000 per year or $300,000 together with his or her spouse, or if 2) his or her net worth exceeds $1 million, excluding the value of his or her primary residence. Entities can also qualify as accredited investors. For example, trusts with assets in excess of $5 million or other entities in which all members are accredited qualify as accredited investors themselves.
Why is this important? There are a few exceptions, but for the most part, private securities offerings in the U.S. are limited to accredited investors.
Since the Great Depression, companies have been required to go through the costly and time-consuming IPO process to issue and sell securities to the general public. There are several exemptions available for private offerings, which do not require the issuer to submit to the same disclosure and review process. Private offerings are considered riskier than public offerings, and thus are usually reserved for investors who theoretically have the means to fend for themselves and withstand financial loss: accredited investors.
The accredited investor standard has evolved over the years. The Dodd-Frank Act, which was passed in 2010, excluded the value of an investor’s primary residence from the net worth calculation, resulting in fewer individuals who qualify.