Aug 12, 2013

What is an Accredited Investor?

With the new JOBS Act there has been a lot of buzz in the news lately about accredited investors. So what is an accredited investor?

An accredited investor is a person with a net worth of at least $1 million (excluding the primary residence) or a minimum $200k in income in each of the past two years ($300k if you're married).

Accredited investor status was imposed by the Securities and Exchange Commission (SEC) to protect average investors from losing all their money in higher risk investments including angel investments, limited partnerships, hedge funds and venture capital firms.

Today there are approximately 268k accredited investors in the U.S. and they invest roughly $23 billion per year in high risk investments. It is estimated that 9 million U.S. households today have a net worth over $1 million, which means only 3% of all accredited investors currently invest in high risk ventures.

The ideas of the accredited investor is that individuals with significant net worth and income can afford to lose money on risky investments. In other words, if a millionaire loses $25,000 investing in a start up he or she can still pay their bills.

Proposed legislation in the JOBS Act is going to change all of this. We just don't know if that's going to be a good thing or a bad thing. Time will tell.