What does it mean to be an accredited investor?

At a Glance —

• To be considered an accredited investor you must meet income, net worth, professional or insider status thresholds set forth by the SEC
• Accredited investors benefit from access to unregistered securities and alternative investment vehicles such as select real estate ventures, private equity and venture capital funds
• Alternative investments each have a different risk and return profiles which must be thoroughly researched before making an investment

An accredited investor is a term used in the world of finance and investments to describe individuals who meet certain financial criteria and are therefore eligible to participate in certain investment opportunities that are not available to the general public. The concept of an accredited investor is rooted in the belief that these individuals have the financial expertise and resources necessary to evaluate and assume the risks associated with complex investments.

The definition.

In the United States, the Securities and Exchange Commission (SEC) sets the standards for determining accredited investor status, which includes having a net worth of at least $1 million, excluding the primary residence, or having an annual income of $200,000 ($300,000 for couples) for each of the last two years, with the expectation of earning the same amount in the current year. Additionally, individuals who hold certain professional designations may also qualify as accredited investors. These qualifications include certain licenses from the Financial Industry Regulatory Authority (FINRA), including the Series 7, Series 65 and Series 82.

How to show you’re accredited.

There is actually not a formalized process for becoming an accredited investor — responsibility falls to the sellers of unregistered securities to verify the income or status of individuals or entities who wish to be treated as accredited investors.

Individuals can obtain written confirmation from —

A registered broker-dealer

An investment adviser registered with the Securities and Exchange Commission (SEC)

A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law

A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office

Any confirmation provided by a third-party must certify that reasonable steps were taken to verify that you are an accredited investor within the prior three months.

Individuals may also be asked to supply documentation to the seller of unregistered securities, including evidence such as a balance sheet together or supporting attachments like tax returns, W-2 forms or other income verification.

An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

What are the benefits?

One of the main benefits of being an accredited investor is access to exclusive investment opportunities, such as private placements, hedge funds, venture capital investments and commercial real estate. These types of investments are not subject to the same level of regulation as publicly traded securities, and as such, they are generally considered to have a different risk and return profile. As a result, they are often only available to accredited investors who are considered to have the financial sophistication to understand the risks involved and make informed investment decisions.

• Greater potential returns that are not correlated with overall market performance
• Enhanced diversification to build a truly rounded portfolio
• Access to a greater range of investment opportunities

In addition to accessing exclusive investment opportunities, being an accredited investor can also provide individuals with the opportunity to invest in income generating real estate potentially offering higher returns and/or regular cash payouts compared to other asset types. Asset-backed commercial real estate provides the benefit of current operations, collecting rent and growing occupancy.

One common misconception about being an accredited investor is that it provides access to all investment opportunities, regardless of the level of risk involved. In reality, accredited investors are only eligible to participate in certain types of investments and are not automatically granted access to all investment opportunities. It is important for accredited investors to thoroughly research and understand the eligibility requirements for each investment opportunity they are interested in and to make informed investment decisions based on their own financial goals and risk tolerance.

Bottom Line —

Being an accredited investor is a designation that provides individuals with access to exclusive investment opportunities and the potential for higher returns. This also comes with the responsibility of thoroughly researching and evaluating the risks and potential rewards of any investment. Accredited investors should seek professional advice, work with experienced teams and thoroughly understand the eligibility requirements for each investment opportunity they are interested in.