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?
An accredited investor is a person or business that meets specific qualifications and is allowed to deal in securities that might not be registered with financial authorities.
Accredited investors are those that can invest in unregistered investments provided by hedge funds, venture capital funds and similar companies.
What Qualifies You as an Accredited Investor?
To qualify as an accredited investor, you must meet one of the following criteria from the SEC:
For Individuals
- 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
In 2020, the SEC added new ways for people to qualify as accredited investors:
- Hold a general securities representative license, the investment adviser representative license or the private securities offerings representative license
- Be a “Knowledgeable Employee” as defined by Rule 3c-5(a). This includes general partners, executives or directors.
- Be a family client of family offices.
For Entities
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.
How Do You Become an Accredited Investor?
If you want to purchase an unregistered security, the first step is to approach the seller. They will likely give you paperwork for a background check to see if you are qualified.
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.
What Are the Benefits of Being an Accredited Investor?
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.
What Are the Risks of Being an Accredited Investor?
Accredited investors are responsible for handling large amounts of money and following the law for high risk investments.
The Bottom Line
To keep your status as an accredited investor, you must be aware of any regulatory changes. Keep your finances at the minimum threshold, your professional licenses up to date and avoid criminal activity that could put your qualification in jeopardy.
Gabrielle Olya contributed to the reporting for this article.