Non-Accredited Investors: Cryptocurrency Investment Opportunities And Challenges

Cryptocurrency has become an increasingly popular investment option, but can a non-accredited investor participate in this market? To answer this question, it is important to first understand who is classified as a non-accredited investor. In the United States, the Securities and Exchange Commission (SEC) defines an accredited investor as an individual or entity that meets specific income and net worth guidelines. For an individual, this typically means having an annual income of over $200,000 ($300,000 with a spouse) and a net worth exceeding $1 million, excluding the value of their primary residence. Those who do not meet these criteria are considered non-accredited investors.

Now, when it comes to investing in cryptocurrency, the rules are a bit different. Cryptocurrency is a decentralized and unregulated market, which means it is not subject to the same regulations as traditional securities. As a result, non-accredited investors are generally able to invest in cryptocurrency without any restrictions. However, it is important to note that the cryptocurrency market is highly volatile and carries significant risks.

While non-accredited investors can legally invest in cryptocurrency, it is crucial for them to carefully consider their financial situation and risk tolerance before doing so. Cryptocurrency investments may not provide the same level of protection and regulatory oversight as traditional investments. Therefore, individuals should conduct thorough research and understand the potential risks and complexities involved before allocating their funds.

Who is an accredited investor?

An accredited investor is an individual or entity that is allowed to buy and sell securities that are not registered with the Securities and Exchange Commission (SEC). They are deemed to be financially sophisticated and able to bear the risks of investing in unregistered securities.

Accredited investors are defined by the SEC as qualified to invest in complex or sophisticated types of securities that are not closely regulated. They are given privileged access to pre-IPO companies, venture capital companies, hedge funds, angel investments, and various deals involving complex and higher-risk investments.

To become an accredited investor, an individual or entity must satisfy at least one requirement regarding income, net worth, asset size, governance status, or professional experience. The specific criteria include:

• An annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year.
• A net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of the primary residence.
• Being a general partner, executive officer, or director of a company that is issuing unregistered securities.
• Being a private business development company or an organization with assets exceeding $5 million.
• Being an entity where all equity owners are accredited investors.

The accredited investor designation is important because it determines who is eligible to invest in many early-stage companies and allows companies raising capital to determine their pool of potential investors.

How to become an accredited investor?

To become an accredited investor, an individual or entity must meet certain income and net worth guidelines. The Securities and Exchange Commission (SEC) defines an accredited investor through the confines of income and net worth in two ways:

• A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
• A natural person who has an individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person.

The SEC also considers applicants to be accredited investors if they are general partners, executive officers, or directors of a company that is issuing unregistered securities. In addition, certain professionals with specific licenses, such as the Series 7, Series 65, or Series 82, are considered accredited investors.

It is important to note that there is no formal process or certification for becoming an accredited investor. Instead, the companies that issue unregistered securities determine a potential investor's status by conducting due diligence prior to the sale.

The benefits of being an accredited investor include access to unique investment opportunities, potentially higher returns, and increased diversification. However, there are also drawbacks, such as high risk, high minimum investment amounts, high fees, and illiquidity.

What are the pros and cons of being an accredited investor?

Anyone can invest in cryptocurrency, regardless of their accreditation status. However, only accredited investors can invest in certain securities and investment funds that are off-limits to non-accredited investors.

Pros of Being an Accredited Investor

Accredited investors have access to unique and restricted investments, such as pre-IPO companies, venture capital companies, hedge funds, angel investments, and equity crowdfunding. They can also benefit from higher returns and increased diversification. The primary benefit of being an accredited investor is that it gives you a financial advantage over others. Because your net worth or salary is already among the highest, being an accredited investor allows you access to investments that others with less wealth do not have access to. This, in turn, could further increase your wealth.

Cons of Being an Accredited Investor

The main drawbacks of being an accredited investor are the high risk, high minimum investment amounts, high fees, and illiquidity of the investments. Most investments that require accreditation come with a high risk. Many funds employ high-risk strategies to beat the market. With high risk comes the possibility of high investment losses. Accredited investors will likely have to commit large sums of money, often in the hundreds of thousands or millions of dollars. If an investment goes wrong, they stand to lose a significant amount of capital. Furthermore, there are higher fees associated with accredited investor investments, including performance fees of 15-20% on top of management fees. Another disadvantage is the long capital lock-up time, which can range from one to five years or more.

Who is a non-accredited investor?

A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The concept of a non-accredited investor comes from the various SEC acts and regulations that refer to accredited investors.

The current standard for an individual accredited investor is a net worth of more than $1 million, excluding the value of their primary residence, and an income of more than $200,000 annually (or $300,000 combined income with a spouse) for each of the past two years, with the same expected for the current year. A non-accredited investor, therefore, is anyone making less than $200,000 annually (less than $300,000 including a spouse) and has a total net worth of less than $1 million when their primary residence is excluded.

Non-accredited investors make up the bulk of investors in the world. When people speak of retail investors, they often mean non-accredited investors. This term covers everyone who holds less than $1 million in assets, aside from the value they may have in their house, and earns under $200,000, i.e., the vast majority of Americans. According to a 2023 report from the SEC, accredited investors made up only 18% of households in 2022.

The SEC regulates what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency. The SEC was created to protect regular people from getting into investments they couldn't afford or understand. The SEC assumes that all parties involved know the risks and rewards involved, so they have a lighter regulatory touch where these funds are concerned.

How can non-accredited investors invest in private companies?

A non-accredited investor is any investor who does not meet the income or net worth requirements set out by the Securities and Exchange Commission (SEC). The current standard for an individual accredited investor is a net worth of more than $1 million, excluding the value of their primary residence, and an income of more than $200,000 annually (or $300,000 combined income with a spouse) for each of the past two years, with the same expected for the current year.

Non-accredited investors are limited in their investment choices for their own safety. The SEC regulates what a non-accredited investor can invest in and what those investments need to provide in terms of documentation and transparency. Private funds, private companies, and hedge funds can do things with investor money that mutual funds cannot do because they deal primarily with accredited investors.

That said, non-accredited investors can invest in private companies through equity crowdfunding. This is because the amount needed to invest is usually very small, as equity crowdfunding seeks to pool investments from many investors.

The SEC has also approved specific rules that limit how much a non-accredited investor can invest. Those with an annual income or net worth below $100,000 are limited to investing no more than $2,000 or up to 5% of the lesser figure of their net worth or annual income. Those making at least $100,000 have a 10% cap on 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 offers those looking for investors the opportunity to network with friends, family, colleagues, and the community to encourage investors to join in funding a new business.

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.

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