Understanding the Difference Between Accredited Investors and Accredited Purchasers

Investing in private securities and investment funds can be an exciting opportunity, but it also requires a certain level of financial sophistication. In the U.S., the Securities and Exchange Commission (SEC) has established categories to identify these savvy investors: accredited investors and accredited purchasers. While these terms might seem interchangeable, they have distinct definitions, criteria, and implications. Let's dive into what sets them apart.

Who are Accredited Investors

Accredited investors are defined by the SEC under Regulation D. This designation opens the door to private securities offerings that aren’t registered with the SEC, providing opportunities for investments that the general public cannot access.

Who qualifies as an accredited investor?

For individuals, the criteria include an income test and a net worth test. If you’re looking at the income test, you’ll need to have an annual income of at least $200,000 (or $300,000 if combined with your spouse) for the past two years, with a reasonable expectation of maintaining this income level. The net worth test requires you to have a net worth exceeding $1 million, either alone or together with your spouse, but this figure excludes the value of your primary residence.

Entities can also qualify as accredited investors. This includes banks, insurance companies, registered investment companies, business development companies, and small business investment companies. Additionally, entities with over $5 million in assets, provided they were not formed solely to acquire the securities in question, meet the criteria. Directors, executive officers, or general partners of the issuing company also fall under this category.

Accredited Purchasers

Accredited purchasers, on the other hand, are defined under Section 2(a)(51) of the Investment Company Act of 1940. This designation is particularly relevant for those investing in private investment funds, such as hedge funds, private equity funds, and venture capital funds.

What makes an accredited purchaser?

For individuals, the bar is set higher: you must own investments worth at least $5 million. For entities, the criteria can be even more stringent. Certain entities like family offices qualify if they manage at least $5 million in assets and their clients are family members or key employees.

Additionally, entities that own and invest on a discretionary basis with at least $25 million in investments meet the requirements. This category also includes investment companies registered under the Investment Company Act or business development companies, as well as certain trusts and organizations with investments exceeding $5 million, provided they weren’t formed for the specific purpose of acquiring the securities offered.

Key Differences

So, what are the main differences between accredited investors and accredited purchasers?

Firstly, they are defined by different regulations. Accredited investors fall under Regulation D of the Securities Act of 1933, while accredited purchasers are defined by Section 2(a)(51) of the Investment Company Act of 1940.

Secondly, the purpose and use of these designations differ. Accredited investors are typically involved in private placements and unregistered securities offerings. In contrast, accredited purchasers are primarily relevant for private investment funds.

Another significant difference lies in the financial thresholds. Accredited investors have lower financial requirements, such as a $1 million net worth or $200,000 annual income. On the other hand, accredited purchasers need a higher level of investment, such as owning at least $5 million in investments for individuals or $25 million for entities.

Lastly, the scope of entities that qualify also varies. The accredited investor category is broader, encompassing a wider range of entities and individuals with relatively lower financial requirements. The accredited purchaser category is more restrictive, requiring higher financial thresholds and encompassing specific types of entities.

In summary, both accredited investors and accredited purchasers represent sophisticated investors capable of handling high-risk investments. However, the criteria for accredited purchasers are more stringent, reflecting the higher level of sophistication required for investing in private investment funds. Understanding these distinctions is crucial for anyone looking to navigate the complex world of private investments.

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About PhilanthroInvestors

PhilanthroInvestors combines traditional venture capital financing tools with philanthropic principles to achieve social impact. By secure, meaningful, and profitable investments, they bring capital and also change people’s lives.

PhilanthroInvestors are currently working in four sectors – Housing, Water, Health and Environment – and will be adding more investment sectors in the future. PhilanthroInvestors founder Ivan Anz owns companies on three continents and has investors in 14 countries.

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