Investor Types and Terminology

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In 1929. $396 billion dollars were wiped out of the markets. Pretty tragic right? A lot of the money was lost from the average American household.

The United States Government wanted to protect the uninformed investor so the Security and Exchange Commission (SEC) was formed in the 1933.

In the 1933 Act, the SEC deemed that only certain types of investors can invest in private investments: like Venture Capital, Private Equity, Hedge Funds, among others….

When you are raising capital or trying to start your first fund, it is vital to understand the different types of investors. I’ll briefly outline:

These terms are important to know because you don’t want to go raise money from the wrong person and be in trouble with the SEC. Or on the flip side- if you are a passive investor, you don’t want to give your money to someone that doesn’t know what they are talking about!

Non-Accredited Investors

If you are raising a fund, you typically want to stay away from non accredited investors. The criteria of an non-accredited investor is:

  • Less than $1 million in net worth (excluding primary residence)
  • or Less than $200,000 gross income per year (single) or $300,000 per year for joint filers.

There are few other stipulations, but those are the biggest ones to know about. When you are raising a fund, under a Reg D 506 (b) filing, you can only raise money from 35 non-accredited investors. It’s important to note that this is one of the only filings that you can raise capital from non accredited investors.

But if you do raise money from them – you have to over-disclose your performance and you essentially just became a babysitter for them.

Accredited Investors

Accredited Investors are defined as basically the inverse of a non-accredited investor:

  • More than $1 million in net worth (excluding primary residence)
  • or More than $200,000 gross per year (single) or $300,000 per year for joint filers.

Accredited investors are good, but not great. Here’s why:

You can only charge one fee to an Accredited Investor. It is common for that to be a Management Fee if you are hedge fund, otherwise it can also be a performance fee.

Family Offices

A family office is essentially a wealth management firm for high net worth (HNW) or ultra high net worth (UHNW) individuals. They are all encompassing financing for ultra rich.

Family Offices are common places to go raise money from because most of these funds invest a portion of their AUM into alternative assets.

HNW and UHNW individuals are measured differently by different institutions – in J.P. Morgan’s Private Bank (like a family office, except on a larger scale) to be considered a HNW individual someone needs to have $10 million in liquid investible assets. To be considered an UHNW client someone needs to have $50 million in liquid investible assets.

Qualified Clients

Qualified Clients are the best type of client to have because they qualify for both 506 (b) and 506 (c) funds as well as fit the criteria on a 3(c)(1) filing. Note that if you qualify to be a qualified client, then you are by default an accredited investor as well. The benchmark:

  • $2.1 million net worth (excluding primary residence)
  • or $1 million with an investment advisor

Read more about Qualified clients at Verified Investor.

Empire State Building

Qualified Purchasers

A Qualified Purchaser is the second highest type of investors. You can invest in all funds including both a 3(c)(1) and a 3(c)(7). To be a Qualified Purchaser, you have to:

  • have a $5 million net worth (excluding primary residence)
  • or have over $25 million if you are a registered entity

Read more about Qualified Purchasers at Compliance Building.

Institutional Investors

Institutional Investors are the big boys on the block. They actually account for almost half of the trading volume on the NYSE!

To borrow the definition from Investopedia:

“An Institutional Investor is a company or organization that invests money on behalf of other people… Broadly speaking, there are six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds, and insurance companies.”

Institutional Investors are much more difficult to land as clients because they are so large. They have more liberties than other investor types because they are deemed to make “more responsible investing decisions.”


Depending on what type of fund you are starting/running and how much money you are looking to raise there are different SEC regulations & rules that you need to be aware about.

We will be outlining these rules and regulations that apply to raising private capital in our future blog posts. Follow our blog to stay updated or sign up for a free 1- hour webinar training at Investment Fund Secrets.

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