Investor Classifications

bull-bear

5 min

bull-bear

5 min

Kick back and relax because today we’ll be discussing a topic that is a lot easier to digest: different investor types.  There are a variety of terms that you may have heard floating around in the investment space:

  1. accredited investor;
  2. non-accredited investor; and
  3. qualified purchasers It’s important to understand that each term has a specific meaning and, depending on which term applies to you, impacts how an investment into a company can occur.

FYI - You’ll notice several concepts appear here from an earlier Weekly BS.

First, let’s walk through understanding the term “public,” as used in "Initial Public Offerings,” (IPOs) meaning the offering of a company’s securities to the investing public for purchase. Going public gives companies the broadest possible reach and the greatest chance of raising capital because anyone can invest.

Where do different types of investors go to buy and sell securities? They go to the “public markets,” which usually refers to exchanges like NASDAQ and NYSE.  In this case, “public” just means anyone old enough to have a brokerage account (18 or 21 depending on the state).  Now, we don’t mean to quiz you but we hope you remember that Regulation A+ is also a public offering.

Defining Accredited Investors

But what about private offerings?  That’s where investor types become relevant and things get a bit more complicated. Most private offerings require accredited investors at a minimum. An accredited investor is defined by Federal Securities Laws (under rule 501 of Regulation D) as someone whose individual net worth, or joint net worth with that person's spouse exceeds $1,000,000 (without including a primary residence) OR a person whose had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years AND has a reasonable expectation of reaching the same income level in the current year.

What's a Non-Accredited Investor?

non-accredited investor, sometimes known as retail investors, includes any investor whose net worth is less than $1 million and has an income under $200,000 individually (or $300,000 with a spouse) therefore not meeting the requirements of an accredited investor per the SEC.

Full disclosure: the definition of an accredited investor is actually really long and complicated, and a place where this adventure shall not venture!  However, if you're interested in taking a deep dive into the topic of "accredited investors," an excellent place to start is here.

What's a Qualified Purchaser?

This brings us to our final investor type, Qualified Purchasers (QP).  You can think of a QP as a super accredited investor.  A QP as defined by the Investment Company Act of 1940, is any person who owns at least $5,000,000 worth of investments OR who invests for a group of people that collectively own $25,000,000.  Why would someone need to qualify as a QP? It has to do with exemptions from registration with the SEC, specifically if a hedge, venture or other fund wants to operate with more than 100 investors and not register, all of the investors must be QPs. 

At this point, you may be thinking, “why can’t anyone invest in anything they want?”  The answer is risk, and goes back to the SEC’s main purpose of protecting investors. The problem is that some investments are riskier than others, have little short-term liquidity, or may be very complicated to understand.  In order to prevent people from losing their shirts, the SEC wants to make sure that investors have enough money to withstand a big loss, and the investment experience to make informed decisions.

That’s the adventure for this week - and a big shout out to all the AIs, Non-AIs, QPs, and general public reading this!

Have a great weekend.