The Accredited Investor: How Wealth Qualifies You for Elite Investment Opportunities

,
how to be an accredited investor banner image

Investing in private markets can provide opportunities for potentially higher returns compared to public markets, but also involves more risk. Private companies are not required to make the same disclosures and meet the same regulatory standards as public companies. In the United States, only investors who meet certain wealth and income thresholds set by the SEC, known as accredited investors, can participate in private markets.

While the intent is to limit private market investments to sophisticated investors who can understand the risks, being an accredited investor does not guarantee one has the knowledge or risk tolerance for these types of investments. All investments carry risk, and it’s important for any investor to carefully evaluate their personal financial situation and goals when considering private market opportunities. Thorough due diligence and working with qualified financial advisors is highly recommended before allocating capital to higher risk private investments.

There may be valid reasons to reconsider whether current accredited investor standards optimally serve the best interests of investors and private companies. However, within the current regulatory environment, meeting accredited investor requirements is necessary to access the potential opportunities and risks of private markets. Investors should weight these possibilities in the context of their overall investment strategy. This article explains the qualification criteria for becoming an accredited investor and available investment opportunities.

What is an accredited investor?

The “accredited investor” designation was created to identify investors believed to have the knowledge and financial sophistication to evaluate investment opportunities with limited SEC oversight. By meeting accredited investor requirements, you legally certify having the means and capability to understand the risks of private market investments. This gives sellers of unregistered securities the legal clearance to market to accredited investors, who are assumed to comprehend the lack of standard investor protections.

However, simply meeting income and net worth minimums does not necessarily equate to financial sophistication. And not all accredited investors may fully grasp the heightened risks of private market investments lacking SEC disclosures and approval. Responsible private market participants should ensure accredited investors are adequately informed about the unique risks and illiquidity involved. Investors should also carefully consider their personal risk tolerance and investment goals when assessing private market opportunities.

What qualifies you to be an accredited investors?

You can become an accredited investor if you are an individual human (what the courts call a “natural person”) satisfying any of the following criteria:

  • Income that is higher than $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the last two years and can reasonably expect the same for the current year
  • Net worth of over $1,000,000. This could be either by yourself or combined with a spouse or spousal equivalent (note that your primary residence can’t go towards this net worth figure).
  • Are licensed in Series 7, 65, or 82. (Series 7 is the general securities license, Series 65 is an investment advisor license and Series 82 is a private securities offering license.)

In addition to individuals, some entities and trusts also carry accredited investor status. 

Entities (like a fund or a firm) can qualify to be an accredited investor in one of two ways:

  • If the total assets of the fund is higher than $5,000,000 and the entity wasn’t formed specifically to purchase the securities
  • If all of the individual equity owners of the entity are accredited investors

Trusts can qualify to be an accredited investor if the trust has over $5,000,000 in total investments, and the trust was not formed specifically to purchase the securities. 

Further information about qualification for accredited investors can be found on the SEC website here

How do I prove that I’m an accredited investor?

The best method to prove that you are an accredited investor differs for each type of investor. 

For individuals:

  • If you use income as accreditation proof, you must have evidence that you have earned the required income for two consecutive years and expect to continue to earn a similar income. This is generally accomplished by providing tax filings or pay stubs. 
  • If you use net worth as accreditation proof, you must provide evidence that you have a net worth of at least $1M. This proof will include all documentation related to your personal assets and liabilities which could be found in a variety of places including credit report, IRS forms, deeds for real estate, proof of vehicle ownership or third-party valuation of holdings. Your primary residence is excluded from this calculation.
  • If you use a license as accreditation proof, you’ll need to provide the proof of passing your Series exam. If you don’t know if your license is in good standing you can check with FINRA (more information here).

For individualsentities and trusts, a good way to prove that you are an accredited investor to the issuer is to have a licensed CPA, attorney, SEC-registered investment advisor, or broker review the relevant documents and write a letter (an email is also acceptable) to the seller of securities. 

I’m an accredited investor. What’s next?

Congratulations! You now have access to many different kinds of opportunities; however, it’s critical to carefully evaluate each opportunity. Reflect on your personal financial goals, time horizon and risk tolerance before allocating significant capital to higher risk private markets. Learn more about new asset classes that become available now that you’re an accredited investor here.

One response to “The Accredited Investor: How Wealth Qualifies You for Elite Investment Opportunities”

  1. […] your friend is starting a new company, and you’re an accredited investor considering making an angel investment. You’ve heard about LLCS (limited liability companies) […]