Companies, hedge funds and other entities can’t offer or sell securities unless the transaction is registered with the Securities and Exchange Commission, or there is an exemption from registration available. Certain securities offerings that are exempt from being registered can only be offered to or purchased by an accredited investor, according to the SEC.
- What Is an Accredited Investor?
- What Qualifies You as an Accredited Investor?
- How Do You Become an Accredited Investor?
- Do You Have To Prove You Are an Accredited Investor?
- What Are the Benefits of Being an Accredited Investor?
- What Is a Qualified Investor vs. an Accredited Investor?
Accredited investors are those that can invest in unregistered investments provided by hedge funds, venture capital funds and similar companies.
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To qualify as an accredited investor, you must meet the following criteria:
- Have an income that exceeded $200,000 individually or $300,000 together with a spouse during each of the prior two years, with expectations to earn the same for the current year; OR
- Have a net worth of $1 million, individually or with a spouse, excluding the value of a primary residence
Banks, partnerships, corporations, nonprofits, trusts and other entities can also be accredited investors. Entities can qualify as accredited investors if:
- The entity has assets exceeding $5 million and is directed by a person who has sufficient knowledge and experience to evaluate the benefits and risks of the prospective investment; OR
- All of the entity’s equity owners are accredited investors
Qualifying as an accredited investor means the SEC deems an individual or entity capable of bearing the financial risks associated with investing in unregistered securities.
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If you want to qualify as an accredited investor, you must pass either the income test or the net worth test.
To pass the income test, you must meet the individual or joint income requirements — $200,000 and $300,000, respectively — for two consecutive years, with the expectation of reaching the same level of income in the current year. You cannot mix and match individual and joint income requirements over those three years unless you get married within the three years.
To pass the net worth test, you need to calculate your net worth to see if it exceeds $1 million. This means you must add up the monetary value of all your assets — including bank accounts, retirement accounts, cars and other investments — and subtract your liabilities such as student and car loans, any portion of your mortgage that’s underwater and the balance on your home equity line. The value of your primary residence is not included in this net worth calculation.
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If you want to purchase securities from a company or private funds, such as a hedge fund or venture capital fund, without the transaction being registered with the SEC, you must be an accredited investor.
In some cases, you might not have to prove you’re an accredited investor to take part in the transaction, but the seller or issuer will have to do their due diligence to verify you are. SEC rule 506(c) allows accredited investors to make a purchase as long as the issuer takes reasonable steps to confirm the accredited investor’s status.
One way an issuer can verify you as an accredited investor is to conduct a background check. A seller or issuer could disqualify you as an accredited investor for certain criminal convictions in the last 10 years. The following circumstances might invalidate your status as an accredited investor:
- Criminal convictions due to false SEC filings, security purchases or sales, or improper business conduct
- Injunctions and restraining orders related to SEC activity that are in effect at the time of the proposed transaction
- A final order based on fraudulent, manipulative or deceptive conduct and issued by a federal or state regulatory agency that bars the accredited investor from engaging in the business of securities, insurance or banking
- SEC disciplinary and cease-and-desist orders that suspended or revoked the accredited investor’s former registration as a broker, dealer or investment adviser
- A false representation order from the U.S. Postal Service
Some issuers might decide to shift the verification responsibility to a professional third party. In this case, attorneys or CPAs can write and sign a letter stating that they verified an accredited investor’s net worth and background to verify the individual’s status.
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Being an accredited investor gives you access to certain investment opportunities. These opportunities include angel investing, hedge funds and crowdfund deals. Although these types of investments can provide a higher yield, they’re usually riskier than other types of investments. It’s up to you as an accredited investor to do your research and decide if the investment is worth the risk.
An accredited investor is a person or entity that passes the net worth test. Qualified investors might also have access to the same types of investments if they can prove their “financial sophistication,” which basically means demonstrating that they have significant investments.
One difference between a qualified investor and an accredited investor is the net worth required. Whereas a qualified investor must have a $1.5 million combined net worth with their spouse, an accredited investor only needs a $1 million combined net worth. Qualified investors must also have at least $750,000 in assets under management.
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Gabrielle Olya contributed to the reporting for this article.