A company or private fund, such as a hedge fund, cannot 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.
Keep reading to find out what an accredited investor is, and how to know if you need one if you’re seeking angel investors.
What Is an Accredited Investor?
Accredited investors are able to invest in unregistered investments that are provided by hedge funds, venture capital funds and other similar companies.
To qualify as an accredited investor, a person must meet the following accredited investor requirements:
- Has 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 residency
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 that the SEC deems an individual or entity capable of bearing the economic risks associated with investing in unregistered securities.
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How to Become an Accredited Investor
If you’re an individual who wants 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 a person gets married within the three-year period.
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 worth of all your assets — including bank accounts, retirement accounts, your car and other investments — and subtract your liabilities, including 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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Do You Need to Be an Accredited Investor?
If you wish to purchase securities from a company or private fund, such as a hedge fund or venture capital fund, without the transaction being registered with the SEC, you will need to be an accredited investor to take part in the transaction.
Click to see how you can choose a broker and start investing.
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