What Is an Accredited Investor?

What Is an Accredited Investor?

When it comes to individuals, an accredited investor is someone who meets at least one of the following three requirements:

1. Had annual earned income over $200,000 (or $300,000 in combination with a spouse or the equivalent) in each of the previous two years and has a reasonable expectation of similar income this year
2. Has a net worth over $1 million, either individually or combined with a spouse, or the equivalent (net worth does not include the value of your primary residence)
3. Has a Series 7, Series 65 or Series 82 license in good standing

You can also be an accredited investor if you are:

1. A broker-dealer registered with the SEC, an investment advisor registered with the SEC or your state, or an exempt reporting advisor
2. A director, executive officer or general partner of the company selling the securities, or of a general partner of that company
3. A "knowledgeable employee" of the company selling the securities

Certain trusts or entities can also be accredited investors.

The Securities Act of 1933 requires all securities offered for sale to be registered with the SEC and provide important financial information that can help investors make informed decisions. However, some types of offerings are exempt from registration. These investments may offer the potential for high returns, but also tend to be riskier, harder to sell and provide less information to investors than registered offerings. Due to their risks, exempt investments are open only to accredited investors who can afford to lose their entire investment.

How to Become an Accredited Investor

Before you invest in any type of exempt security, the SEC requires the company, entity or broker offering it to take reasonable steps to confirm that you're an accredited investor. Different companies may have their own requirements, but in general, here's how it works:

• You can become accredited based on income by showing documents such as W-2 forms, tax returns, pay stubs or letters verifying your employment.
• To become accredited based on net worth, you'll need to provide bank, brokerage or similar statements that include your name, the date and the value of the account.
• You may also be able to become accredited using a letter attesting to your income or net worth from a CPA, attorney or professional with a Series 7, 65 or 82 license.
• If your accreditation is based on your Series 7, 65 or 82 license, you'll need to prove you have the license and it is in good standing.

If no one bothers to check your accredited investor status, the SEC cautions, consider it a red flag. Securities offered without following SEC regulations may not be wise investments.

What Types of Investments Require Accredited Investors?

Investment opportunities that are exempt from SEC registration requirements are restricted to accredited investors. These include:

• Private placements: Both private and public companies use private placements to offer securities to a small pool of investors. This could be shares of stock or an interest in a limited partnership or limited liability company. The securities aren't publicly traded, so they may not be easy to sell.
• Hedge funds: Similar to mutual funds, hedge funds use investors' money to purchase securities and other investments. Because they aren't regulated in the same way as mutual funds, hedge funds are much more aggressive, sometimes borrowing, short-selling or using other speculative approaches to investing.
• Private equity funds: These funds pool money from various investors, typically investing in long-term opportunities. For example, a private equity fund may invest in a rapidly growing startup or purchase a controlling interest in an existing business and take actions to increase its value.
• Private real estate investment trusts (REITs): REITs invest in real estate that produces income and receive a share of the income as dividends. Public REITs are traded on stock exchanges, but private ones are not.
• Angel investing: Angel investors are often experienced businesspeople who invest in startup and early-stage businesses in exchange for an ownership share or convertible debt. They don't have to be accredited, but many are. Angels sometimes pool their money in angel funds, which often require investors to be accredited.
• Venture capital (VC) funds: These funds invest in fast-growing companies that have the potential for high returns. VC funds generally invest for 10 years with the goal of growing the company rapidly before exiting the business and, if all goes well, delivering a profit to investors.
• Regulation crowdfunding: Anyone can help startup businesses crowdfund via platforms such as Fundable or SeedInvest. However, there are restrictions on how much non-accredited investors can invest in one 12-month period. Accredited investors can invest an unlimited amount.

How Non-Accredited Investors Can Invest

Not everyone can be an accredited investor, but everyone can invest. Investing inherently involves risk, so before you start, make sure your finances are in good shape and that you have a solid emergency fund, minimal debt and a realistic budget.

• Begin investing by contributing to employer-sponsored retirement plans such as a 401(k) or 403(b). If your workplace doesn't offer such a plan, you can open an individual retirement account (IRA) with a bank, credit union or investment firm.
• If you've maxed out your retirement plan contributions and your budget allows, consider investing through a brokerage account. You can manage your account yourself or use a robo-advisor or financial advisor. Mutual funds and exchange-traded funds (ETFs) allow you to own small shares in a wide range of securities, but you can also buy individual stocks.
• If you're interested in real estate but can't afford an income-producing property of your own, investing in a REIT gives you a share of any income earned by the trust's properties.
• Diversifying your portfolio by choosing investments from a mix of asset classes, industries and risk levels can help reduce risk and enhance returns. For example, a mix of 60% stocks and 40% bonds has delivered an average annualized return of 10% over the last 10 years. (Stocks are considered high-risk and bonds are considered low-risk investments.) Another option: Invest in target-date funds, which automatically rebalance to lessen risk as you get closer to retirement.