Some exotic, riskier investment alternatives are only available to certain individuals or entities that meet certain requirements and regulations. They are known as accredited investors.
Since they are high-net-worth individuals and have sufficient experience, accredited investors can acquire unregulated, private, and riskier investment assets. This group of “exclusive” and complex securities may include early-stage startup shares or venture capital, hedge funds, and leveraged buyouts.
Do you want to learn more about accredited or qualified investors and become one? Here are all the details you need!
Key Takeaways
- The SEC considers “accredited investors” to be individuals “qualified” to invest in complex or sophisticated securities.
- Unregistered securities are riskier than other investments because they are only required to disclose basic information.
- A person must have a yearly income of $200,000 or $300,000 (if combined with a spouse’s income) or work in the financial industry to be considered an “accredited investor.”
- Qualified investors may only invest in unregistered securities if they meet one or more of the requirements regarding their asset size, net worth, skills or professional experience, and governance status.
- Those selling unregistered assets may only offer complex investments to qualified or accredited investors who are financially sophisticated enough to bear related risks.
What Is a Qualified Investor?
Also known as accredited investors, qualified investors are individuals or entities that can trade assets or securities that have not been registered with financial authorities, so they are considered riskier.
When considered “accredited investors,” they obtain some privileges, including access to assets that the regular investor could not acquire. However, they must meet at least one of several requirements.
Become an Accredited Investor: What Requirements Do You Have to Meet?
These are the requirements any individual and entity must meet in order to become an accredited investor.
Accredited Investor Income
To be considered accredited or qualified, an investor must earn at least $200,000 or $300,000 if combined with their spouse’s earnings. It should be an annual income and not a fleeting income.
Accredited Investor Net Worth
In addition, investors with a net worth of at least $1 million or more may also be considered qualified. This amount can be combined with a spouse but must not include a primary residence’s value.
Accredited Investor Skills
Those who hold a Series 7, 65, or 82 license or are knowledgeable employees of an investment fund may also be considered “accredited investors” and gain exclusive access to some assets.
Although the requirements seem very strict, these criteria have been designed and implemented to protect investors who do not have sufficient cash reserves to deal with significant losses.
The Securities and Exchange Commission (SEC) believes that less experienced investors could make decisions that can harm their finances and get in over their heads since some offerings require only minimum investments.
Although this fact does not mean there will be an immediate loss of money, putting your money in unregistered assets is quite riskier because these investments should not disclose too many details other than basic information.
According to the SEC, under Regulation D, an accredited investor does not need protection through regulatory disclosure filings and is financially sophisticated. This group includes high-net-worth individuals, also known as HNWIs, insurance companies, banks, brokers, and trusts.
Are Accredited Investors Legally Authorized to Purchase Unregistered Securities?
Even if the securities are not registered with regulatory authorities, such as the SEC, accredited investors can buy them. In fact, some companies offer them directly to this group of individuals or entities.
Since companies aren’t required to register securities with the SEC, the process needs less money. However, this offering or “private placement” can present a great deal of risk for investors. Therefore, authorities must make sure that those who purchase these assets are financially stable and have sufficient knowledge or experience to make risky investment decisions.
It is also important to understand that the role of regulatory authorities is limited when companies sell these assets to reputable investors. They should only verify or offer guidelines to determine which individuals or entities qualify as an accredited investor.
In addition, regulatory authorities can also determine if the potential investor meets the requirements in terms of financial status, risk tolerance, and knowledge.
What Does the Securities and Exchange Commission (SEC) Say About the Requirements?
As mentioned, individuals and entities must meet certain requirements to be considered accredited investors. However, regulations may vary in each jurisdiction and may be defined by other competent authorities or a local market regulator.
Essentially, an accredited investor must have an annual income of $200,000 or $300,000 for at least two years and expect the same or higher income in the current period.
However, investors cannot satisfy this requirement by showing one year of individual income and two years of joint income with their spouses. Additionally, a qualified investor must have a net worth of over $1 million, individually or together with their spouse, but it must not include a primary residence.
People working as executive officers, general partners, or directors for a company issuing unregistered securities may also be considered accredited investors. This group may also include those who can demonstrate sufficient education or experience in unregistered securities.
Finally, regarding the entities, the regulations say that any private business development company or organization with assets valued at $5 million or more also qualifies within this category.
When their equity owners are accredited investors, these entities are also considered “qualified.” However, organizations cannot be formed solely to purchase specific securities.
Recent Changes Made by the US Congress and SEC
After US Congress amended the accredited investor definition to include investment advisors and brokers, the SEC said the amendments would allow individuals or entities to qualify as “accredited investors” based on their professional knowledge, certifications, or experience besides the required net worth and income.
The amendments to the accredited investor definition also expanded the list of entities that can qualify within this category, allowing any entity or company that meets the investments test to purchase complex assets.
Now, according to the definition by the Securities and Exchange Commission, accredited investors can include the following:
- Different individuals with certain credentials, designations, and certifications
- State-registered investment advisers
- SEC-registered investment advisors, and knowledgeable employees of a private fund.
Accredited Investor Benefits: What Assets Can You Buy If You Are One?
If you are an accredited investor, these are some of the assets in which you can invest:
- Angel investment
- Venture capital
- Private equity funds
- Real estate investment funds
- Hedge funds
- Specialty investment funds, including those focusing on cryptocurrency
Structured products, private equity or hedge funds, and shares in private placements may also fall into this category.
Sellers may offer investors securities considered Regulation D (Reg D) offerings. Any company registering these assets is only required to provide basic information about the company’s officers, location, or offering.
If the investor needs or wants more details, they should request them directly from the issuing company in Reg D offering or private placement.
Accredited Investor Verification: How Do Companies Verify That You Are an Accredited Investor?
Although accredited investors must comply with regulating regulations and requirements, they do not undergo federal verification. Each company must verify that prospective partners have the right status before allowing them to invest.
Therefore, as part of each company’s verification process, each individual or entity must prove that they meet several qualifications for the “accredited investor status.”
Some potential investors will need to prove income and net worth through tax returns, or bank and investment statements. Other persons or entities may also have to show proof of securities, employment, or licensing.
Accredited Investor Qualifications
Becoming an accredited investor is possible as long as you comply with the requirements and regulations. However, since no federal agency oversees these transactions, the whole process takes place between the potential buyer and the company or institution selling the unregistered asset.
In order to prove that they meet the accredited investor status or qualifications, potential buyers must comply with some steps set by the company. Overall, this is the process that sellers usually follow to find out if a customer is qualified or not, regardless of their net worth or income:
Provide a questionnaire to the potential investor (Buyers must complete it to provide more details about their status)
Request documents to know the investor’s financial status, including tax returns, financial statements, or other documents that allow the seller to verify that the potential buyer meets the net worth and income requirements
Evaluate potential buyer’s credit report to verify if they meet the net worth requirement or determine if there are outstanding liabilities that the investor has not reported
Request potential investors to submit an attestation letter issued and signed by a tax attorney, certified public accountant (CPA), or financial advisor
In some cases, if the potential buyer is an accredited buyer because he meets professional, experience, or knowledge requirements, the seller may request other documents.
This evidence must prove the investor’s status as CEO, executive, or partner in firms that sell unregistered assets. Some of the documents that buyers can use in this step include resolutions and governing documents.
In addition, a buyer who wants to qualify as an accredited investor based on their professional certifications can also provide verification of securities licenses from the Financial Industry Regulatory Authority (FINRA).
Why You Should Become an Accreditor Investor? – Advantages and Disadvantages
Do you plan to become an accredited investor? Before making a decision, you should consider its advantages and disadvantages.
Advantages of Being an Accredited Investor
As mentioned, one of the main advantages that accredited investors enjoy is access to complex and riskier investments that could yield higher returns and help them earn more money.
However, accredited investors can enjoy other benefits. One of them, for example, is that those who buy unregistered assets can get greater returns that are not correlated with the overall market performance.
In other words, these investments can help some people make money even if the market falters or some negative event affects it.
Furthermore, by purchasing these unregistered assets, an accredited investor also enhances diversification. A diversified portfolio can help people protect their hard-earned money when an asset performs poorly and increase the chances of future profit.
Finally, reputable investors also have access to many more investment opportunities, which can also benefit your investment strategy, especially if you plan to put your money in different assets to hedge your portfolio against inflation or other similar events.
Disadvantages of Being an Accredited Investor
However, becoming an accredited investor could also bring some disadvantages.
First, unregistered securities are typically high-risk investments. In fact, that’s the main reason why the SEC has established rigorous criteria to determine if an individual or entity can be considered an accredited investor.
Therefore, although they could make greater profits and have access to different investment opportunities that could diversify their portfolios, an accredited investor is at a higher risk of losing some money. In the worst-case scenario, they can lose all of their invested capital.
In addition, these investment complexes often have high investment minimums. Those who want to buy hedge funds or private equity funds, for example, may have to pay around $100,000 or more to participate.
These investment alternatives also usually have lock-up periods where buyers or holders cannot make withdrawals. Therefore, reputable investors may also have to deal with less liquidity.
Finally, there are fees, which are usually very high for most investment assets. The most common fee structure that reputable investors tend to find is the classic two plus 20 arrangement.
According to this fee structure, they must consider a 2% annual management fee and a 20% performance see (it’s based on profits) for their investments.
Final Thoughts
Authorities and regulators have set accredited investor rules to protect potential investors from losses that risky ventures take if they have limited financial knowledge or insufficient cash to withstand failers.
However, a person who becomes an accredited investor can also enjoy many advantages, including benefits related to large financial assets that those who buy modest goods do not usually enjoy.
In either case, as a potential buyer or investor, you should weigh the pros and cons of every decision you make.
Considering the pros and cons of becoming an accredited investor is key to determining if it’s the right path for you and knowing if you are ready to face greater risks or put more money into your purchases.
Frequently Asked Questions
Are There Other Ways to Become an Accredited Investor?
Yes, you’re right! As mentioned, a firm’s director, executive, general partner, or executive officers may be considered accredited investors.
Additionally, a financial professional with FINRA Series 7, 62, or 65 may also be considered a qualified investor.
Any person or entity managing a trust with assets worth $5 million or more can also obtain accredited investor status.
Why Does a Person Need Accredited Investor Status to Invest in Complex Financial Products?
Complex and risky offerings are often limited to accredited investors to ensure that all buyers and participants are financially sophisticated.
This status guarantees that people can withstand greater risks and large losses. Therefore, these investors do not need the regulatory protections registered offerings often have.
What Should My Net Worth Be To Qualify As an Accredited Investor?
If you have a net worth of more than $1,000,000, either individually or jointly with your spouse or partner, you can become an accredited investor.
However, this amount must not include the primary residence.
Can I Invest In Startups As an Accredited Investor?
Yes, you can! Accredited investors usually have several options available to invest in startups. Generally, they do this through venture capital firms. Some also source private placement offerings through an online marketplace.
Can An Accredited Investor Invest in Hedge Funds?
Yes, of course! Accredited investors can put their money in a hedge fund, which is an investment vehicle that fund managers use to “chase alpha.”
These investments have also been designed to deliver positive returns even if market conditions are not favorable.
