Accredited Investor: Definition and How to Become One
You’ve no doubt heard those success stories about people investing early in a startup and hitting it big when it takes off. Or maybe you just really want to invest in the next up-and-coming company. But you found that you need to be an accredited investor. What does that mean, and do you qualify? This guide helps explain what an accredited investor is and what it takes to qualify as one.
What is an accredited investor?
An accredited investor has the proper credentials to invest in assets not registered by the U.S. Securities and Exchange Commission. This designation exists to protect novice investors from riskier investments. The qualifications (discussed below) usually revolve around money (so you can weather risk) or knowledge (so you can assess risk). Accredited investors can be individuals or legal entities (i.e., corporations or financial entities).
Recent Changes to the Accredited Investor Definition
As of 2020, Congress amended the definition of an accredited investor to include professionals like investment brokers and advisors. They reason that their knowledge, measured by experience certifications and passing specific tests, makes them eligible to become accredited investors. This takes eligibility for accredited investors from people with money to include professionals with knowledge.
How does one become an accredited investor?
There are a few ways for someone to become considered an accredited investor. The core paths relate to two core attributes: money and knowledge. Money indicates that you can weather the risk of a non-registered SEC investment. Financial knowledge shows you can evaluate the risk.
Income
You can score the accredited investor designation by showing that you have earned $200,000 (or $300,000 as a couple) on your last two tax returns. You must also show that you are on track to continue earning this amount or more.
Net worth
You can also qualify financially if your net worth is over $1 million. You cannot include the value of your primary residence in this calculation.
Professional certifications or designations
Certain professional certifications show you have enough knowledge to invest in high-risk unregistered securities. These include:
- Series 7 license
- Series 65 license
- Series 82 license
The professional certification or designation qualification is relatively new with the SEC, so there is the possibility that a new path toward becoming an accredited investor will be added in the future.
Knowledgeable employees of private funds
The final way you can qualify as an accredited investor is by being a knowledgeable employee of a private fund. These employees are defined as:
- A person in a leadership role for a private fund like an executive, board member, partner, director, or trustee
- An employee of the private fund who manages investment for 12 months or more
Determining accredited investor eligibility
Companies selling investments must verify your eligibility before accepting money. There are a few ways to go about this:
- Verify your income or net worth. You will need to show things like tax returns, W-2s, bank statements, or proof of other assets. Remember, your primary residence is excluded from this.
- As of 2020, you can show proof that you are a knowledgeable employee of a private fund.
- You can also show that you have a Series 7, 65, and 82 licenses.
Example of an Accredited Investor
Potential accredited investors have many ways of qualifying. Here’s an example to illustrate. Joe has made $175,000 over the last two years. His primary residence is $1.5 million, his car that he owns outright is worth $75,000, his 401(k) has $525,000, and he has a savings account with $400,000.
Joe doesn’t qualify under his income because he doesn’t earn $200,000. But he qualifies based on his assets. His assets total $1 million because he can’t count his primary residence. Joe is considered an accredited investor because he qualifies in one area-- net worth. He does not need to be eligible in all areas.
Other types of accredited investors
You may not qualify as an accredited investor, but a legal entity you are associated with may qualify. Here are some examples of companies that can qualify as accredited investors:
- Corporations or LLCs with $5 million or more in total assets
- Financial institutions like banks
- Employees of private funds
- Some types of insurance companies
You can read more about other types of accredited investors here.
Why do you have to be an accredited investor?
The accredited investor designation aims to create safeguards against risky investments. The SEC wants people to invest in high-risk investments, but only if they have the money or knowledge to do so.
When you’re an accredited investor, you can invest in some of these investments:
- Hedge funds
- Private equity funds (includes venture capital and angel investing)
- Online real estate investment that involves crowdfunding
Accredited investors fall under the Truth In Securities Law. A form of this regulation has been around since the Great Depression to protect novice investors and has been amended through the years. Along the way, the act requires financial disclosure, giving investors more transparency. This also is aimed to prevent fraud and misrepresentation.
Can non-accredited investors invest?
Many investment methods don’t require the accredited investor designation. Anything that is traded publicly is fair game: stocks, bonds, mutual funds, REITs. You just need a brokerage account. You can also access these investment accounts in retirement accounts like 401(K)s. You can also invest in other assets like real estate. At Doorvest, we help people invest in real estate. Contact us to find out more.