To be an accredited investor to a startup, you have to meet certain requirements under federal securities law. It basically means that the government knows you’ve got the dough and the resources to actually be a legit investor in a young company.
The specifics of the designation is outlined in Regulation D of the Securities Act, for those who like to read such documents and is specific to the qualified private placement of securities
Now for the rules. Rule 501(a) of Regulation D defines an “accredited investor” as a person who meets certain net worth tests or other specified quantitative criteria (i.e. someone who is rich AF). This includes but is not limited to 1) directors, executive officers and general partners of the issuer (AKA issuer “insiders”), 2) individuals whose net worth or joint net worth with their spouse exceeds $1 million (not including the place where they live), and 3) individuals whose income was more than $200,000 in for the past two years or whose joint income with their spouse was greater than $300,000 in each of those years and who have a reasonable expectation of reaching the same income level in the current year. If you’re part of a corporation of a fund, you can be an accredited investor if the value of your assets is more than $5 million or if every person on the investment team individually qualifies according to the requirements of accredited investors.
Why is this? Well, investing in a startup business is a risk. It takes a lot of blood, sweat and tears but also a lot of cash. And this protects potential businesses from partnering with someone who promises said cash but then can’t actually deliver. This means bad news for everyone.
An accredited investor is to a startup what a sugar daddy is to a young girl trying to make it in the big city, only a lot more legal and a lot less gross.