In order to qualify as an accredited investor, an individual needs to meet certain income or net worth requirements set forth by the Securities and Exchange Commission (SEC). The accredited investor definition was created as a way for investors to demonstrate their capability to safely invest in specific types of products..
Becoming an Accredited Investor
To obtain accredited investor status, a person must fulfill one of the following requirements:
- Have earned an income greater than $200,000 (or $300,000 combined with a spouse) during each of the previous two calendar years. The person must also have a reasonable expectation that he or she will maintain this level of income during the current year.
- Have a net worth greater than $1 million as an individual or with a spouse (excluding the value of the primary residence, but including liabilities exceeding the value of the primary residence and liabilities incurred on the primary residence within the last 60 days).
It is important to note that the income requirements that comprise the accredited investor definition must be met using the same method in each of the three years, whether as a single individual or jointly with a spouse.
Investment Opportunities
According to the SEC, a company issuing its own securities must register those investments with the SEC before it can offer them for sale unless it utilizes an exception. Selling unregistered investments only to accredited investors is one of these exceptions.
Accredited investors are able to legally access certain types of investments that are not available to the general public. Some of these investment opportunities include:
- Equity crowdfunding
- Venture capital funds
- Angel investing
- Hedge funds
- Private equity deals
- Other private placements
Who Can be an Accredited Investor?
In addition to individuals, certain types of entities can obtain accredited investor status as well.
Regulation D, Rule 501 gives the definition of an accredited investor. Any entity fulfilling the requirements listed in this section is considered an accredited investor. These entities include:
- Certain trusts
- Employer-sponsored retirement plans
- Banks
- Registered investment advisor (RIA) companies
- Brokerage firms
- Any entity in which all of the equity owners are accredited investors.
In summary, as an accredited investor, you have the ability to invest in various types of unregistered securities not accessible to the general public. No government agency formally gives you accredited investor status. Rather, the companies selling unregistered securities that interest you must take “reasonable steps” to verify that you qualify as an accredited investor.
