How to invest without being an accredited investor requires only that the investor has a net worth of less than $1 million. This includes the net worth of his or her spouse. The investor must also have earned $200,000 or more annually for the last two years.

Differences Between Accredited and Non-Accredited Investors

Accredited

The criteria set by the Securities and Exchange Commission's (SEC) Regulation D states that an accredited individual investor must have a net worth of more than $1 million (including the spouse), must have earned $200,000 or more annually for the last two years, and must also be a general partner, director, executive officer, or related combination.

There are no formal certifications or qualifications to be an accredited investor. As long as an individual meets the minimum net worth, they are automatically accredited. The matter of how much personal wealth a person has is the only distinction between being accredited and non-accredited.

In the United States, an accredited investor has access to investment opportunities that are not available to everyone. For non-accredited investors, this means it would be illegal if someone were to present investment opportunities available in private businesses to you unless you know the founder of the company making the offer. One of the things that make being accredited appealing is the fact it opens up new opportunities for investing in areas such as venture capital and hedge funds.

Another asset of being accredited is noted by the SEC. The organization points out that an investor is considered sophisticated and maintains sufficient funds that can keep the investor protected. This is not the case for an unsophisticated investor.

Non-Accredited

While non-accredited investors are allowed to invest, there are certain restrictions. An example would be a company interested in raising private equity to invest in something like a hedge fund or a new business. While the company can receive investments from an unlimited number of accredited investors, according to Regulation D, it is limited to no more than 35 non-accredited investors providing funding.

Due to Regulation D, more than 80 percent of non-accredited American investors are shut out from investment opportunities. This means that only the wealthiest individuals have access and can participate in early-stage investment.

Few states have made it possible for non-accredited investors to attain equity in startups. These states are:

  • Alabama.
  • Colorado.
  • Georgia.
  • Idaho.
  • Indiana.
  • Kansas.
  • Maine.
  • Maryland.
  • Michigan.
  • Tennessee.
  • Washington.
  • Wisconsin.

Non-accredited investors based in these states have the ability to invest in high-growth opportunities with early-stage firms through a model known as crowdfunding.

The SEC approved specific rules that limit the amount a non-accredited investor can invest. Those with an annual income or net worth that is below $100,000 are limited to investing no more than $2,000 or up to 5 percent of the lesser of their net worth or annual income. Those making at least $100,000 have a 10 percent cap of either their net worth or annual income.

With the new rules in place, small business owners and startup founders are allowed to raise $1 million per year through crowdfunding.

Crowdfunding

In simple terms, the crowdfunding platform offers those looking for investors an opportunity to network with friends, family, colleagues, and the community, etc. to encourage investors to join in funding a new business. As the network expands, more and more people are privy to information about the new business and making an investment.

The SEC has approved equity crowdfunding rules for investors. These rules allow small businesses and startups looking for investors to use brokers or online platforms to find them. Also, the investors can be anyone. For non-accredited investors, the barriers to participating in crowdfunding are extremely low, especially when looking at small businesses and financing startups. Some have minimums as low as $10.

Other options for non-accredited investors to participate in include single-family rentals, P2P loans, municipal bonds, equity investments in energy projects, and real estate. Several other options exist, as well. Overall, the SEC believes that the crowdfunding platforms will be crucial in establishing fair marketplaces as well as guiding potential investors and helping them figure out their best investment options.

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