Takeaways
- Accredited investors are eligible to invest in sophisticated and complex securities.
- Accredited investors must meet specific criteria as defined by the SEC.
- Accredited investors can invest in unregistered securities, which are considered risky.
- Your income, net worth, and professional credentials can impact your eligibility.
- An accredited investor can be either a person or an investing entity.
What is an Accredited Investor?
An accredited investor is an individual or a business entity recognized by financial regulations as having the financial sophistication and capacity to undertake the risks associated with specific investment opportunities that are not available to the public. Becoming an accredited investor allows you to invest in a broader range of investment options, including private equity, venture capital, hedge funds, and private placements.
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Do you want to be an accredited investor? You might need to meet high income or net worth bars to qualify as an accredited investor. For example, you might need an annual income exceeding a certain threshold for the last two years and expect to earn the same (or higher) income this year. Alternatively, you could have a net worth exceeding a certain amount. You can meet these criteria either alone or with your spouse, excluding the value of your primary residence, which can qualify you as an accredited investor.
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The standards for becoming an accredited investor can seem high, but there is a reason for these high hurdles. The concept behind accrediting investors is grounded in the belief that this class of investors possesses the financial acumen to understand complex investments. Importantly, the SEC also wants accredited investors to have the financial resources to absorb losses easily.
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Accredited investors can invest in unregistered investments. Unregistered investments are riskier than other investments because they are not subject to the same degree of regulatory scrutiny as public securities (e.g., stocks traded on the NASDAQ or NYSE).
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The criteria for becoming an accredited investor aim to ensure that individuals or entities engaging in these higher-risk investments have the requisite financial stability and knowledge to make informed decisions without the protective oversight usually provided by regulatory bodies for public investments.
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How to Become an Accredited Investor
Becoming an accredited investor involves meeting specific financial criteria established by regulatory bodies such as the Securities and Exchange Commission in the United States. These criteria are designed to demonstrate an individual or entity's financial sophistication and ability to absorb losses associated with high-risk investment opportunities.
There are two primary buckets for you to be able to qualify as an accredited investor: financial and professional criteria.
Financial Criteria
High Income: An individual must have an annual income of more than $200,000 (or $300,000 together with a spouse) for the last two years, with a reasonable expectation of reaching the same income level in the current year [1].
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High Net Worth: An individual or a married couple's net worth must exceed $1,000,000, either jointly or separately. However, the SEC does not allow you to include the value of your primary residence. Even if you have paid off your mortgage, you must have $1,000,000 in a more liquid net worth.
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Professional Criteria
Professional Certification: In addition to the high income and net worth requirements, more recent amendments to the definition of an accredited investor has expanded eligibility. You can now qualify as an accredited investor with financial professional certifications, designations, or other credentials. In addition, knowledgeable employees of a private fund may also count as accredited investors.
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To prove accredited investor status, individuals may need to provide financial statements, tax returns, W-2 or 1099 forms, and other documentation verifying income or net worth. Financial institutions, brokers, or issuers of unregistered securities often require investors to complete a questionnaire or provide documentation to verify accredited investor status before allowing participation in unregistered investment opportunities (e.g., private companies raising equity capital).
Why You Have to Be Accredited
The accreditation requirement is a regulatory safeguard to ensure that investors who engage in high-risk, non-registered investment opportunities have the necessary financial resilience and sophistication.
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Investments available exclusively to accredited investors, such as venture capital, hedge funds, and private placements, often involve higher risk, including the potential for total loss of investment, limited liquidity, and less regulatory oversight than publicly traded securities.
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Accredited investors are presumed to have the financial stability and resilience to withstand the loss of their investment without a major impact on their overall financial health. An accredited investor should have, or at least have access to, the knowledge and experience needed to evaluate the merits and risks of prospective investments without the protective measures provided by public securities regulations.
Non-Accredited? Here’s Where You Can Invest
If you do not meet the criteria to be an accredited investor, there are still plenty of investment opportunities available to you. These investments are more accessible and approachable for a broader range of investors, including those just building their investment portfolios or those with low-risk tolerances.
- Stocks: Individual stocks can be a great place for you to invest your discretionary income to increase your net worth. You can invest in stocks or index funds.
- Bonds: Bonds are loans that pay investors fixed or variable rates of returns. You can build a bond ladder to ensure a regular flow of interest income into your portfolio every month. There are a variety of bond types to consider.
- Mutual Funds: Mutual funds are pools of money designed to invest in specific investment strategies by fund managers and can immediately add diversification to your investment portfolio.
- ETFs: Exchange-traded funds are like mutual funds that provide diversification but are traded throughout the day, like stocks or bonds.
- Target Date Funds: Target-date funds are structured like mutual funds but calibrate risks and returns automatically to align with a specified fund end date. Target-date funds help you put your investments on autopilot and are popular for retirement accounts.
- Certificates of Deposits: These short-term notes offer high-yielding returns during times of rising inflation. There are many different types of CDs to choose from.
- High-Yield Savings Accounts: High-yield online savings accounts can give you access to an investment that can earn you high-interest income and has low investment risk. You can open an account online or at a traditional brick-and-mortar location.
- Real Estate Crowdfunding: You can invest on platforms that offer real estate crowdfunding opportunities, which allow you to invest in real estate projects with a relatively small amount of capital.
- Peer-to-Peer Lending: Check out online platforms that facilitate peer-to-peer lending. You can lend money directly to other individuals or small businesses in exchange for interest payments.
- Regulation A+ Offerings: Also known as "mini-IPOs," these offerings allow private companies to raise funds from accredited and non-accredited investors, subject to certain limits and disclosure requirements.
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Smart Summary
Becoming an accredited investor can expand your access to investment opportunities. Accredited investors get to vet high-risk and high-reward opportunities not available to the average investor. This opportunity can give you a massive advantage over investors with smaller incomes and net worth. The good news is that even if you are a non-accredited investor, there are plenty of opportunities to invest and grow your net worth. Overall, selecting investments that adhere to your financial goals is the key to long-term success.
(1) U.S. Securities and Exchange Commission. Accredited Investor. Last Accessed February 10, 2024
