Accredited Investors, Retail Investors and Everyone In Between
Who you can raise money from and how depends entirely on how your investors are classified. Here is a clear breakdown of every investor category that matters under Canadian and U.S. securities law.
Why Investor Classification Matters
Securities regulators classify investors based on their presumed financial sophistication and ability to withstand loss. The more sophisticated the investor, the fewer protections they require and the easier it is for companies to sell them securities without a full prospectus. Getting this wrong can expose an issuer to investor rescission rights, regulatory enforcement, and personal liability for directors and officers.
Retail (Non-Accredited) Investors
The default category. Any individual or entity that does not meet the definition of an accredited investor or other exempt category. Retail investors receive the most regulatory protection issuers generally need a full prospectus or an Offering Memorandum (with investment limits) to sell to them. Most private company capital raises intentionally exclude retail investors for this reason.
Accredited Investors (Canada NI 45-106)
As defined in National Instrument 45-106, key individual categories include:
- Net financial assets exceeding $1,000,000 (alone or with spouse), or net assets exceeding $5,000,000
- Annual pre-tax income exceeding $200,000 ($300,000 with spouse) in each of the last two years, with reasonable expectation of the same in the current year
Institutional accredited investors include registered dealers and advisers, financial institutions, pension funds, and insurance companies. Corporations and partnerships with net assets exceeding $5,000,000 also qualify.
Eligible Investors (Canada OM Exemption)
A category used specifically for the Offering Memorandum exemption. An eligible investor meets one of: net assets of $400,000 or more (alone or with spouse); net income of $75,000 or more (or $125,000 jointly); or is an accredited investor. Eligible investors can invest more than retail investors but less than accredited investors under the OM exemption.
Accredited Investors (United States SEC Rule 501)
Under U.S. securities law, an accredited investor includes:
- Individuals with net worth exceeding $1,000,000 (excluding primary residence), alone or with spouse
- Individuals with income exceeding $200,000 per year ($300,000 joint) in each of the last two years
- Entities with assets exceeding $5,000,000 not formed to specifically invest in the offering
- Registered investment advisers and broker-dealers
Under Rule 506(c) offerings where general solicitation is permitted, issuers must take reasonable steps to verify accredited investor status self-certification is not sufficient. Common verification methods include reviewing tax returns, bank statements, or obtaining a written confirmation from a lawyer or accountant.
Sophisticated Investors (United States Rule 506(b))
Under Rule 506(b), up to 35 non-accredited but "sophisticated" investors can participate in an offering alongside accredited investors. A sophisticated investor must have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment. This requires a substantive assessment by the issuer it cannot be self-certified.
Institutional Investors
Banks, insurance companies, pension funds, registered dealers, and investment fund managers. These entities are presumptively sophisticated and generally qualify as accredited investors under both Canadian and U.S. law. Offerings to institutional investors typically carry the fewest restrictions and the most streamlined process.