Accredited vs Sophisticated Investors: What’s the Difference?

When it comes to investing, it’s crucial to know the distinction between “accredited,” “non-accredited,” and “sophisticated” investors. Each type of investor has different investment options, and it’s essential to figure out which category you belong to. Life Bridge Capital offers multifamily investment opportunities to both accredited and non-accredited investors alike. Keep reading to learn more about these investor categories and whether becoming accredited is a feasible option for you.

Accredited Investors Fulfill SEC Guidelines 

In order to be considered an accredited investor, individuals must meet certain qualifications set by the Securities and Exchange Commission (SEC). These qualifications are outlined in Rule 501 of Regulation D, and at least one of the conditions listed must be met. Accredited investors are a select group of investors who meet these requirements.

• Net Worth: Individual or joint net worth, excluding the value of a primary residence, that exceeds $1 million

• Individual Income: Individual income greater than $200,000 for the past two years with the expectation to reach the same this year.

• Joint Income: Income of a married couple or spousal equivalent that exceeds $300,000 for the past two years with the expectation to reach the same this year.

• Professional Certification: Any person holding at least one professional certification, designation, or credential from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status.

• Knowledgeable Employees: Executive officers, directors, trustees, and advisory board members of a private fund, or an employee of a private fund who participates in investment activities of the fund and has been doing so for at least 1 year.

Several types of entities also qualify as accredited investors, including corporations, family businesses, and tribal entities.

Purpose and Significance of Accredited Investor Status

Private investment offerings can have fewer regulations, because they are restricted to accredited investors. By restricting some investments only to those who are deemed accredited, the SEC intends to promote investor safety in less-regulated private offerings. 

The assumption is that by meeting the accredited investor qualifications, investors have either:

• An expert-level sophistication to engage in private offerings with an understanding of the possible consequences, or 

• The financial wherewithal to absorb the potential for loss

Because of this, accredited investors have access to a greater number and wider variety of investment opportunities, including those not available to the general public. 

Prior to the SEC’s adoption of the knowledgeable employee and professional certification qualifications in 2020, accredited investor status was reserved for the ultra-wealthy and high earners. This policy, while meant to protect investors who would be more likely to experience a financial crisis if the deal went badly, actually excluded some of the most qualified and knowledgeable investors. It consequently barred them from opportunities to climb into the ultra-wealthy ranks themselves.

Sophisticated Investors Are Recognized for Knowledge but Lack a Formal Classification

Sophisticated investors are individuals who possess the knowledge and experience to evaluate the risks and potential of an investment opportunity. Although they may not meet the criteria for being an accredited investor, they are still considered to be financially savvy. While there are no formal qualifications for being a sophisticated investor, they are often professionals such as accountants, bankers, and business owners.

In the United States, sophisticated investors have access to fewer investment opportunities than accredited investors. However, they can still invest in Rule 506(b) offerings, which limits the number of investors to a maximum of 35. This reduces the overall number of investment opportunities available but ensures that the investment remains exclusive to a select group of sophisticated investors.

Consequences of Confusing Accredited & Sophisticated Investors

Although being dishonest when dealing with the SEC is not advisable, investment companies are the ones who bear the brunt of inaccurately classifying investors. This is due to the non-accredited investors’ right to rescind their investment and the company’s obligation to disclose more information to non-accredited investors.

Many jurisdictions grant non-accredited investors the legal right to rescind their investment, and some do not have a time limit for this. This implies that a non-accredited investor can demand their money back, regardless of the contract or the repercussions to the company.

Working with non-accredited investors unknowingly also exposes investment companies to SEC penalties. For instance, the SEC mandates that companies provide greater disclosures to non-accredited investors and places limits on the number of non-accredited investors in certain offerings. It can be challenging for any company to comply with rules for non-accredited investors when they believe their investors are accredited. Therefore, it is essential to understand your investment qualifications to accurately represent yourself to any parties you invest with.

Final Thoughts

Accredited investor status remains the gold standard for investors. This designation opens many doors for those who can meet the requirements. Long-term, those keen to reach the highest levels of investment should keep an eye toward meeting accreditation standards. In the interim, sophisticated investors can still find opportunities as well.
Onbridge Capital works with both accredited and non-accredited (or sophisticated) investors to invest in our multifamily opportunities.