Sophisticated Investors are, in essence, investors who are capable of fending for themselves in a prospective transaction. The term is most often used in the context of discussions about whether a private securities offering qualifies for an exemption from registration under federal and state securities law.
In order to qualify for the Rule 506(b) exemption, for instance, the SEC requires all non-accredited investors to be sophisticated. For the purposes of Rule 506(b), the SEC defines a sophisticated investor as an investor possessing sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.
Preparing for Funding Ep5: Initial Sophisticated Investors