What Is a Non-Accredited Investor?

Non-Accredited Investor Explained in Less Than 4 Minutes

A young couple checks their investments on a laptop in their kitchen.
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A non-accredited investor is a type of investor who fails to satisfy Rule 501 of Regulation D of the SEC’s accredited investor test. This means that the investor in question has a net worth of less than $1 million and their individual income is less than $200,000 per year, or $300,000 if married.

If you’re a non-accredited investor, you won’t have the same investment opportunities as an accredited investor. However, there are upsides to your status, including increased protections from risky investments. Here’s what you need to know about the limitations and benefits of being a non-accredited investor. 

Definition and Examples of a Non-Accredited Investor

Non-accredited investors fail to qualify as accredited investors under the U.S. Securities and Exchange Commission (SEC) accredited investor test standards. If an investor does not meet Rule 501 of Regulation D by having at least $1 million in net worth and earning at least $200,000 per year ($300,000 if married) in income, they are considered to be a non-accredited investor.

To be considered an accredited investor, you must have:

  • Earned income that exceeded $200,000 (or $300,000 with a spouse) for each of the past two years and must reasonably expect to earn as much in the current year
  • A net worth of more than $1 million, excluding the value of your primary residence, or hold in good standing a Series 7, 65, or 82 license

While an accredited investor can be a company or bank, this term is most commonly used to describe an individual. Accredited investors are considered financially sophisticated enough to manage their own investing activities—or wealthy enough to withstand significant losses—without needing SEC protections. The idea is that these investors know enough about the risks of investing to determine whether an asset or venture is a worthwhile use of their money.

  • Alternate name: retail investors

The term “retail investor” often refers to non-accredited investors. Only 13% of American households were considered accredited investors in 2020, according to the SEC. That means the majority of investors in the U.S. are unaccredited. If you do most of your investing through your employer’s 401(k) and your net worth is primarily tied to the value of your primary residence, you are most likely a non-accredited investor.  

The SEC can alter the definition of accredited investor to account for factors such as inflation or to expand investment types to more of the population.

How Being a Non-Accredited Investor Works 

In many states, there are “blue sky” laws in place that set limits on how many non-accredited investors can be included in a financing round before companies have to make more disclosures. The SEC also has regulations in place to determine what a non-accredited investor can invest in, as well as how those investments need to handle documentation and transparency.  

If you are an accredited investor under these federal securities laws, you can participate in certain securities offerings that non-accredited investors cannot. 

Some rules around these types of investors may seem limiting—and in truth, they are—but they are in place to protect more novice investors who may not understand the risks involved or be able to sustain large losses as well as those who qualify as accredited investors. 

What Individual Investors Need To Know

Being a non-accredited investor does limit your potential investment opportunities. For example, if you’re an accredited investor, you can invest in restricted securities, venture capital, and hedge funds. These investments come with significant risks, but also the potential for high rewards. Non-accredited investors do not have the opportunity to profit from these investments. 

The limitations on non-accredited investors can be frustrating but help prevent less experienced investors from losing money in high-risk projects. The SEC limits investment choices for non-accredited investors to protect them. The agency was created after the 1929 stock market crash to protect regular consumers from making investments they couldn’t afford to make or would struggle to understand properly.

Key Takeaways

  • A non-accredited investor fails to satisfy Rule 501 of Regulation D of the SEC’s accredited investor test.
  • To be considered a non-accredited investor, the investor will have less than a $1 million net worth and receive less than $200,000 a year in income (or $300,000 if married). 
  • Many states have blue sky laws in place that set limits regarding how many non-accredited investors can be included in a financing round before a company has to make more disclosures.
  • The SEC limits investment choices for non-accredited investors to protect them from losses they can’t afford and from making investments they don’t fully understand.