Becoming an accredited investor can open up a lot of new investment options.
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In the US, being an accredited investor allows you access to investments that others with less wealth do not have access to. This includes access to many alternate investments and private market opportunities with higher targeted returns.
We’ll walk you through everything you need to know so you can get your accredited investor designation and take advantage of accredited investor opportunities.
In this article:
If you want access to opportunities such as unregulated investments not registered with the U.S. Securities and Exchange Commission (SEC), you'll need to become an accredited investor.
An accredited investor can be an individual who meets specific requirements or an entity such as a corporation or financial institution.
⚠️ To qualify as an accredited investor, you must have one of the following:
In general, the requirement for an entity or an individual to get their accredited investor designation is in place because investment opportunities that are not regulated by the SEC are considered riskier.
The rule is meant to protect less sophisticated investors or those without the financial means to absorb possible significant losses.
You must meet specific income, net worth, or professional credentials requirements to receive an accredited investor verification.
In addition to accredited investors, another similar designation is a qualified purchaser.
The main similarity between these terms is that both can invest in unregulated investment opportunities. In addition, a corporation or other financial institution, including a wealth manager, can be an accredited investor or a qualified purchaser if they meet specific requirements.
💡 However, there is one significant difference between an accredited investor and a qualified purchaser:
Here's a quick comparison between the requirements for each designation:
Federal regulations offer several ways an individual can become an accredited investor:
Let's dive into each below 👇
To be considered an accredited investor:
In addition, the individual or couple needs to provide evidence that their income for the next year is anticipated to be the same or higher.
One more caveat: the income must be reviewed in the same way for both previous years and looking forward - as a single person or a couple. In other words, you can’t have just one spouse’s income for the first year and then both for the second and upcoming years (Except if someone was single and then gets married during these years).
Alternatively, an individual can qualify as an accredited investor based on their net worth, which must be $1 million or higher.
The Dodd-Frank Act in 2010 amended the Securities Act of 1933, which first established the accredited investor requirements to exclude someone’s primary residence from their net worth calculation.
In 2020, the SEC amended the accredited investor definition again, allowing individuals with certain professional designations and licenses from the Financial Industry Regulatory Authority (FINRA) to qualify.
Here are the licenses which qualify:
Another category of people who can qualify as accredited investors are those who work for a private fund that offers unregistered investments.
They are classified as knowledgeable individuals or knowledgeable employees because of their inside understanding of the investment opportunities.
There are multiple paths to verifying your accredited investor status. In fact, you may have already met the requirements to achieve the accredited investor designation.
The process of verifying your accredited investor status is done by either having:
Which one of these two paths you take depends which exemption under Regulation D the seller of the investment is selling the securities under.
As a general rule, if your completing a questionnaire - they are doing a Reg D 506(b). While if you're required to upload a letter from a third party - they are doing a Reg D 506(c) offering.
The most common method that sellers of unregistered investments use to qualify accredited investors is by self certification under exemption 506(b) of Regulation D.
Since exemptions under Rule 506(b) allow investors to self-certify their accredited status, it is less complicated and has remained the private placement exemption of choice for most small issuers - with 4/5 Regulation D placements done with this method.
In order to verify you are an Accredited Investor for an issuer doing a Rule 506(b) offering, you’ll likely need to complete a questionnaire.
This will cover questions about your finances and investing experience, and different issuers may ask for different things. The key thing to remember is that the issuer is relying on your declaration about your status.
If its a Rule 506(c), you can request an accredited investor letter from a qualified, independent third part, such as your:
You’ll likely need to complete a questionnaire about your finances and provide verification of your income level or assets with bank or investment account statements, tax returns, or other financial statements.
You may also be asked to provide a credit report as verification of your net worth and to check on your liabilities.
Here are some examples of accredited investor templates:
You can use these to provide to your qualified independent third party.
If you qualify as a knowledgeable individual, you will need to provide evidence of your position within a company that sells unregistered investments and possibly documentation about the company.
If you have a professional designation, you will need to provide verification from FINRA.
You can provide your FINRA license to the company selling unregistered investments to prove you qualify as an accredited investor.
To acquire your Series 7, Series 65, or Series 82 licenses, each of which will qualify you as an accredited investor, you’ll need to take an exam given by FINRA.
Once you have passed the exam and earned your license, you can provide your documentation to the seller of the investments you want to purchase.
Here’s a high-level overview of each exam:
The steps to achieve your accredited investor status are not particularly difficult as long as you have your financial information easily accessible.
The main reason to follow through on the paperwork to become an accredited investor is to gain access to a wide range of potentially lucrative investment opportunities.
While these investments may be more complex and possibly riskier than some registered investments, they offer the possibility of higher returns.
Among the investment opportunities available to accredited investors are:
Many of these investment opportunities are not available to investors who have not met accredited investor requirements.
There are several reasons it can be worthwhile to determine if you meet accredited investor qualifications, such as:
Still, becoming an accredited investor comes with some disadvantages, such as:
Common questions about how to become an accredited investor include:
Some of those types of investments include private equity firms, hedge funds, venture capital funds, angel investing, and real estate crowdfunding opportunities.
Unless you work for a company that handles unregistered investment opportunities or have a designation from FINRA, you’ll need to qualify as an accredited investor based on your income or your assets.
You either need a net worth – excluding your primary residence – of $1 million or more, or you need an annual household income of $200,000 for an individual or $300,000 for a couple.
You must have that income level for at least two years from the same sources and show a reasonable expectation that your income will continue at that level in the following year.
While you likely know whether you have the income, net worth, or credentials to be an accredited investor, the seller of unregistered investment opportunities must prove that you meet accredited investor requirements.
Typically, you’ll be required to complete a form detailing your financial position and then provide financial statements such as tax returns, W2 forms that prove your income level, bank and investment statements that show your net worth, and a credit report.
In many cases, your financial advisor, CPA, tax attorney, or wealth manager will be asked to provide a verification letter on your behalf.
Becoming an accredited investor can be a fairly quick process as long as you have all your documentation easily accessible.
It’s particularly simple if you have a license from FINRA or have a position where you are considered a “knowledgeable individual.” Proving your financial strength to be an accredited investor may take a little longer since the paperwork must be reviewed, but even then, it can be a matter of a few business days for the investment seller to approve your accredited investor designation.
The primary advantage of earning your accredited investor designation is access to many more investment opportunities.
Unregistered investments such as private equity funds, hedge funds, venture capital funds, angel investor funds, and real estate crowdfunding opportunities are only available to accredited investors. This makes it easier to diversify your investment portfolio, potentially achieve higher returns, and to disconnect your investments from a correlation with stock market returns.
The consequences of lying about your accredited investor qualifications mostly fall on the company selling the investments since it is that company’s responsibility to prove that you meet the requirements to be designated as an accredited investor.
Most funds and investment vehicles are careful to verify all the financial documents, employment information, or licenses you provide to avoid any potential misrepresentation of someone’s accredited investor status.
However, if you falsify documents or provide misinformation about your accredited investor qualifications and are caught doing so, you could face financial and legal consequences.
If you’re interested in expanding your investment opportunities by investing in rental properties, hedge funds, private equity funds, or other potentially lucrative options, you may need to receive an accredited investor verification.
Accredited investors, who typically have a high income or a high net worth and are therefore more likely to be more sophisticated financially, can usually withstand the risks and potential losses from investments that are not registered by the SEC.
While there are some risks to be aware of with these investments and potentially high minimum investments, meeting the accredited investor requirements allows you to investigate a variety of new opportunities that may build your wealth quickly.
It’s likely worth your time to review your financial position to see if you meet the accredited investor qualifications and evaluate new investment opportunities.
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