Accredited Investor: Who Can Buy Private Shares?

Takeaway: Not everyone can invest in private companies; the “accredited investor” designation restricts access to those deemed financially sophisticated and/or with high net worth or income. This protects less experienced individuals from high-risk investments, but also limits their access to potentially high-growth opportunities.

Private market investments, like shares in pre-IPO companies, aren’t available to everyone. The Securities and Exchange Commission (SEC) uses the “accredited investor” standard to limit who can participate. This is designed to protect individuals who may not have the financial knowledge or resources to weather potential losses. While this protects many, it can also exclude some from potentially high-return opportunities.

So, who qualifies as an accredited investor? The SEC has a few different ways to meet the criteria:

• Net Worth: Individuals (and their spouses) with a net worth exceeding $1 million, excluding the value of their primary residence. Think of it as all your assets (investments, savings, other properties) minus your liabilities (debts) – and your home doesn’t count.
• Income: Individuals with an annual income exceeding $200,000 in each of the two most recent years (or $300,000 jointly with a spouse), with a reasonable expectation of the same income level in the current year. This means consistent high earnings, not a one-time windfall.
• Certain Entities: Entities such as banks, insurance companies, registered investment advisors, and certain trusts can also qualify. This includes sophisticated financial institutions and large investment funds.
• Knowledgeable Employees: In certain private fund offerings, individuals who are “knowledgeable employees” of the fund can also qualify.
• SEC and State Registered Investment Advisors: Registered investment advisors automatically qualify as accredited investors.
• Family Offices with at Least $5 Million in Assets Under Management: Family offices managing a substantial amount of assets are also considered accredited.
• Spousal Equivalents: Certain “spousal equivalents” as defined by the SEC can also qualify.

Why these requirements? Private market investments can be illiquid (hard to sell quickly) and carry higher risks than publicly traded stocks. The accredited investor standard intends to ensure investors can handle potential losses without significant financial hardship and have a certain level of sophistication to evaluate the risks.

What are the implications of being (or not being) accredited?

• Access to Investments: Accredited investors have access to a wider range of investment opportunities, including venture capital funds, hedge funds, and pre-IPO company shares.
• Risk Tolerance: These investments are often higher risk, and the accredited investor standard aims to ensure those participating can handle potential losses.
• Financial Sophistication: While not a direct requirement, it’s assumed accredited investors have a certain level of financial understanding or access to professional advice.

Learn More:

• Private Company vs Public Company: Key Differences
• The Primary Market vs Secondary Market: Where Shares Change Hands

So here’s what we covered:

• The definition of an accredited investor and the different ways to qualify.
• The rationale behind the accreditation requirements.
• The implications of being (or not being) accredited.
• Links to further reading on related topics.