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Are You an Accredited Investor?

If you’re an accredited investor, there are many more investment opportunities available to you.

[Updated: Apr 12, 2021 ] Aug 07, 2019 by Matt Frankel, CFP
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There are lots of investment opportunities anyone can participate in. For example, anyone with a brokerage account can invest in publicly traded stocks, and there are no specific qualifications needed to be able to buy an investment property.

But some types of investments aren't available to the general public. Many people can't simply decide to invest in a hedge fund or other private fund, even if they have a good amount of extra cash sitting around. The same can be said for most private-equity investments, venture capital funds, and private equity and crowdfunded real estate investment deals.

To participate in these types of investments, as well as others that choose not to adhere to the Securities and Exchange Commission (SEC) registration requirements, you'll need to be an accredited investor. And specific guidelines separate accredited investors from the general investing public.

What is an accredited investor?

An accredited investor is defined as is an individual or entity with a certain level of financial sophistication and therefore is able to conduct due diligence on investment opportunities. To meet the accredited investor definition, an investor must satisfy specific criteria.

The SEC allows investors to obtain accredited investor status by meeting one of several qualifications. Note: These apply to individuals, but there are also ways corporations and other entities, such as institutional investors, can qualify as accredited as well.

How to become an accredited investor?

Here are the three most common ways individuals can qualify as accredited investors:

  • Qualify by income: An individual can qualify as an accredited investor if they have an annual individual income of at least $200,000 for the past two consecutive calendar years and a reasonable expectation of the same in the current year. Alternatively, they can qualify if they have at least $300,000 in joint income with a spouse.
  • Qualify by assets or net worth: An individual or couple can qualify as an accredited investor if they have at least $1 million in net worth, excluding their primary residence. You can determine this by adding up the value of your total assets and subtracting your total liabilities, or debts, aside from any mortgages on your primary home. The $1 million figure applies to single individuals or couples using their joint net worth to qualify.
  • Qualify by credential: Thanks to change in the definition of an accredited investor August 2020, individuals can now qualify as an accredited investor based on certain professional credentials or certifications. This currently includes individuals who have obtained Series 7, Series 65, or Series 82 licenses, but the list of credentials is likely to be expanded in the future. State- or SEC-registered investment advisors also qualify.

Also included in the recent rule changes is the addition of the term "spousal equivalent." This means that if one spouse qualifies as an accredited investor, that person's spouse does as well.

How do you register as an accredited investor?

There's no central database to register as an accredited investor. It would certainly be more convenient if you could, for example, register with the SEC as an accredited investor once and be done with the process.

Unfortunately, this isn't the case. You'll likely have to register as an accredited investor every time you want to participate in a restricted investment opportunity. You may only have to register once with each firm, but it's far from a universal registration at this time.

When you register as an accredited investor, you can expect to fill out some sort of questionnaire to determine if you qualify, and you'll also have to submit documentation that verifies your answers. So if you qualify as an accredited investor based on your income, you may have to submit your two most recent tax returns.

Why does it matter if you're accredited?

Why does the SEC care if you're accredited? Why can't just anyone participate in a hedge fund or private-equity investment opportunity?

There are a few reasons. First, accredited investors, or qualified investors, tend to be more financially sophisticated than the average person. Someone who has passed the Series 65, for example, knows how to analyze investment opportunities. Second, most accredited investors have significant financial resources and can afford to take losses on investment opportunities that don't work out.

Of course, this isn't a perfect system. It's certainly possible for someone to meet the definition of an accredited investor who really isn't a sophisticated investor able to analyze complex investment opportunities. Plenty of millionaires have no clue how to read financial statements. And plenty of people with financial credentials don't have enough money to absorb losses.

The bottom line

The accredited-investor rule and the verification process are there to protect you, not the firms offering investment opportunities. The idea is to make sure you have enough financial sophistication to know what you're getting into, as well as enough financial cushion to absorb losses if an investment doesn't go well.

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