Who is an Accredited Investor and Why?

Between stocks, bonds, funds, ETFs, precious metals, and other asset markets, there is no shortage of investment opportunities. Whether for retirement, short, or long term profits, investing is how you can grow a small amount of money into a large amount. Most are open to all investors regardless of their expertise or lack of it. Some are reserved only for those considered experienced enough to understand the risks involved.

Why Become an Accredited Investor?

Under federal securities laws, there are some investments available only to those who meet specific requirements for knowledge, net worth, and risk education. Why bother to jump through government hoops for a few investments when there are so many open to every investor?

There are investment opportunities that are not required to register with the SEC, but in not doing so they are only available to accredited investors who meet specific requirements that assure they are knowledgeable about the risks and have the assets for higher risk. Some examples includei:

  • Private equity offerings – composed of funds and investors that invest directly in private companies or buyouts of public companies.
  • Hedge funds – investment pools actively managed with a wide range of strategies to provide above average returns.
  • Venture capital – investing in new companies, often those starting with just an idea or business strategy but without the capital necessary.

These investments are higher risk, but often their ROI, Return on Investment, is well above average.

Requirements to Be an Accredited Investor

In the context of a natural person, an accredited investor includes anyone who:

  • Earned income over $200,000, or $300,000 income with a spouse in each of the prior two years. They also expect the same in the current year, OR
  • Has a net worth more than $1 million, alone or with a spouse (excluding the value of a primary residence), OR
  • Holds in good standing a Series 7, 65, or 82 license.

There are some other categories of accredited investors which are relevant to some who do not fit the categories above:

  • Trusts with assets more than $5 million, if the trust was not formed exclusively to invest in the asset. The trust must be directed by a sophisticated person, OR
  • Other specific entity with assets over $5 million if it was not formed specifically to invest in the subject securities.
  • Any entity with all members meeting the requirements of accredited investors.

When in doubt, consult accounting or tax services for advice.

Calculating Your Net Worth

Calculating your net worth for the purpose of meeting the requirements for an accredited investor is not difficult. Simply, subtract all your liabilities from your total assets to arrive at net worth. The one specific exclusion is your primary residence. Up to the fair market value of the residence, any loan or mortgage against it does not count as a liability in the net worth calculation.

At the endnote reference link, you will find examples of net worth calculations. If you can qualify, carefully examine offerings, as there may be some lucrative opportunities.

i Accredited Investor Explained – Investor.gov


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