The investment options that we've discussed so far are open to anyone. They're well-regulated and fairly easy to understand. Certain especially risky or complex investment vehicles, though, are only available to accredited investors.
Accredited investors are, supposedly, sophisticated enough to understand the risks and ramifications of these investments. They can invest in vehicles that aren't registered with the SEC. This category includes:
- Private companies and start-ups,
- Hedge funds,
- Private equity funds (including venture capital funds), and
- Private real estate partnerships.
Who's accredited? The definition's simple. In order to qualify as an accredited investor, either:
- Have an annual income of at least $200,000 (or $300,000 for a married couple) for the last two years with the expectation of making that this year, too, or
- Have a net worth of at $1,000,000, excluding the value of a private residence.
This bar isn't impossible to clear, but it's fairly high. This is intentional. Keeping the bar high ensures that investors are unlikely to financially ruin themselves.