Accredited Investor Vs Sophisticated Investor: Key Differences

The terms “sophisticated investor” and “accredited investor” are sometimes used interchangeably.

But they’re not quite the same. 

A sophisticated investor is a high net worth individual with extensive financial knowledge and experience. But a sophisticated investor isn’t an accredited investor. 

Besides, the investment opportunities available to a sophisticated investor are slightly different from those available to someone with an accredited investor status.

Let’s examine what an accredited investor is and how to become accredited. We’ll also explore all about a sophisticated investor and the accredited investor vs sophisticated investor differences. 

We’ll also show you an excellent long-term investment regardless of your investor status! 

What Is An Accredited Investor?

An accredited investor can be a person or a business that can invest in complex securities not registered with the financial authorities - or unregistered securities. They could be high-net-worth individuals, a bank, an insurance company, or a private company. 

(Any investment product in the US is considered a security. And, as stated in the Securities Act, investment companies must register with the SEC to ensure greater transparency. This also helps any potential investor make better-informed decisions about investment products.) 

Let’s look at the requirements a potential investor needs to meet to qualify for accredited investor status.

What Are The Requirements To Become An Accredited Investor?

The SEC amended its accredited investor definition on August 26, 2020. 

The updated accredited investor definition requires you to meet at least one of the following requirements: 

• Net worth: You’ll need a net worth greater than $1 million, excluding the value of your primary residence.
• Income: Your annual income needs to exceed $200,000 individually or have a joint income of $300,000 with a partner in the two years prior, and you must reasonably expect the same for the current year. 
• Professional certification: Investment professionals holding a qualification, credentials, or designation recognized by the SEC can qualify as an accredited investor. 

Qualifications such as the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82) will help you qualify as an accredited investor.

• Knowledgable employees: The SEC also recognizes the company's directors, executives, and general partners selling the securities, provided they’ve been in the position for at least a year. 
• Family offices with total assets exceeding $5 million in AUM (assets under management) and their “family clients,” as defined by the Investment Advisors Act, are also considered accredited.

Interestingly, an investor can be classified as a qualified purchaser, a qualified investor, or a qualified institutional buyer as well. 

To be considered a qualified purchaser, you need, among other things, a net worth exceeding $5 million, excluding the value of your primary residence. 

Next, let’s take a closer look at what a sophisticated investor is.

What Is A Sophisticated Investor?

Typically, a sophisticated investor is a high net worth individual with advanced market knowledge and investment experience - although there’s no such formal classification. 

They’re usually professionals like a registered investment advisor, an accountant, a banker, or business owner with significant wealth and many income streams.

They’re non accredited investors but are capable of evaluating the pros and cons of any prospective investment. They have access to high-risk investments, including private offerings like pre-IPO securities, private equity, equity crowdfunding, real estate, and, sometimes, a hedge fund. 

What Are The Requirements To Become A Sophisticated Investor?

The guidelines of who is a sophisticated investor are not very well defined. 

But, these tips can help one improve “financial sophistication”: 

• As an individual investor, you need to understand the investment documents and contracts to make a wise investment decision. (These are stipulated to be disclosed by the Investment Company Act.) For instance, check the net assets if investing in a private fund or private company. The net assets indicate the company’s net worth. 

Speak to an investment advisor if it’s overly complicated. Making a poor investment decision may make it more tricky to improve your investor status.

• Stay up-to-date with market developments if you want to improve your investor status. As an individual investor, take advantage of newspapers, investing books, podcasts, and more to soak up as much information as possible.
• An excellent way to prove your financial sophistication as an investor is to ensure your portfolio is well-diversified. Invest in a mix of traditional assets and alternative investments to safeguard your portfolio. As a retail investor you should also keep monitoring your portfolio so that you buy and sell assets at the right time.

So, how are the two types of investors different?

Accredited Investor Vs Sophisticated Investor

It can be challenging to draw distinctions between a sophisticated investor and an accredited investor. 

And, you could say that all sophisticated investors are non accredited, but not all non accredited investors are sophisticated.

But here’s a summary of the two main differences:

A. Financial prerequisites

As we’ve seen, accredited investors must meet specific financial prerequisites. 

Knowledge, experience, and a high annual income with sufficient total assets are often the defining characteristics of a sophisticated investor. 

B. Investment opportunities

An accredited investor has access to unregistered securities like a private fund, hedge fund, real estate syndication, real estate crowdfunding, private equity, venture capital, and more. 

These private securities are referred to as private placement or Regulation D offerings, which only require the company to submit basic information about its location, officers, and the offering itself. 

This is in contrast to public offerings, which require the company to submit a lengthy application process with the SEC, offering greater security to the investor. 

But, sophisticated investors have fewer investment opportunities than accredited investors in the US, although they have a deep understanding of financial markets.

The SEC defines the rules for a company to make Regulation D private offerings available to certain investors. For example, rule 506(b) of Regulation D states that any number of accredited investors may invest in public offers, but only a certain amount of non-accredited, sophisticated investors. 

However, there are also limitations on Regulation A investments. For example, in Regulation A and A+, Tier 1 has no investor limits. But sophisticated investors are limited to a specific investment threshold in Tier 2 investments.

In a gist, even if you’re a sophisticated investor, being an accredited investor would be the gold standard to aim for.

Now for the good news!

There’s one fantastic investment opportunity that’s open to both sophisticated and accredited investors. 

The Ideal Investment For Both Accredited And Sophisticated Investors: Fine Wine

Alternative investments like fine wine were once reserved for an institutional investor, qualified investor, or wealthy individuals. The high prices of the world’s best wines, coupled with the extensive knowledge required, meant this asset was out of reach for the non accredited investor. 

Fortunately, that’s no longer the case. 

Thanks to Vinovest, a wine investment platform, this lucrative investment opportunity is now open to any retail investor. 

Wondering how it works? 

Here’s a quick breakdown of the process: 

• Step 1: Begin by signing up with your name, password, and email. 
• Step 2: Complete a quick questionnaire. This will help Vinovest’s wine experts determine your investment style. 
• Step 3: Fund your account. To start, you’ll need $1,000. 
• Step 4: Build your portfolio. Vinovest’s AI will recommend some investment wines based on your answers to the questionnaire. 
• Step 5: Sit back and relax while your portfolio grows. 

Fine Wine: An Excellent Investment For Accredited and Sophisticated Investors 

Although it's tough to distinguish between the two types of investors, we can safely say that an accredited investor requires particular financial requirements. On the other hand, a sophisticated investor often acquires the status through their market knowledge and experience. 

Fine wine is an excellent asset to invest in regardless of whether you're an accredited, sophisticated, or even a non accredited investor. 

If you’d like to take advantage of this investment opportunity, sign up with Vinovest today!