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An accredited investor is an individual or entity who is considered wealthy and financially sophisticated enough to invest in certain high-risk securities, like early stage companies. The Securities and Exchange Commission (SEC) has lower regulatory and disclosure requirements for these kinds of investments, and though they are potentially very lucrative, they offer less consumer protection compared to more conventional instruments.
What is an accredited investor?
It’s a designation by the SEC for individuals or institutions who meet certain criteria, which allows them to invest in opportunities deemed too risky or inappropriate for regular investors.
Here are the requirements for individuals:
- A net worth, combined with their spouse, of over $1 million, not including primary residence
- An income of over $200,000 individually, or $300,000 with a spouse, in each of the past two years
For professionals or entities:
- Investment professionals holding a Series 7, Series 65 or Series 82
- A family client of a family office that qualifies as an accredited investor
- Knowledgeable employees of a private fund who are investing in the fund
- Entities owning investments over $5 million
- SEC-registered Investment advisers and broker-dealers
- Financial entities such as banks, investment companies or business development companies, among others
How do you become an accredited investor?
Let’s start by clearing up any confusion: You don’t receive a license, paperwork or any sort of special designation when you meet the requirements to be considered an accredited investor. However, when considering an investment opportunity open only to accredited investors, you’ll be subject to the company’s screening requirements to determine whether you meet the SEC-defined threshold.
As an individual, you are considered an accredited investor if you have a net worth of over $1 million and an income over $200,000. Note that in this case, your primary residence isn’t included in your net worth, and if you have a spouse your combined income must be over $300,000. The income requirement covers the prior two years as well as the current year, meaning if you hit the net worth and income level, say after a recent promotion, you’ll have to wait two years before you’re considered accredited.
If you’re an investment professional with a Series 7, Series 65 or Series 82 – or about to become one – in some cases you’re considered an accredited investor. Same if you’re at the director or above level of the company selling the security, or if you’re a knowledgeable employee of a private fund that you’d like to invest in. Additionally, if you’re a family client of a family office that is an accredited investor, you qualify.
Where do accredited investors put their money?
There are a wide variety of opportunities for accredited investors. The online investing platform Yield Street, for example, offers art, crypto, real estate, venture capital, short-term notes, legal finance funds and other specialized asset classes. Other platforms, AcreTrader and Percent, for instance, offer access to farmland investments, merchant cash advances and more.
Beyond what you can find online, accredited investors can invest in private offerings that may come up in certain networks and business circles, such as venture capital. Generally speaking, these types of opportunities aren’t listed — they come from who you know and what you’re involved in. For some, this could mean early rounds of startup investing, hedge funds or other types of private funds. Your investment advisor may also present you certain financial instruments or investments to consider if you’re an accredited investor.
Accredited investors have access to opportunities that have potentially huge upside — and are thus riskier — compared to what’s offered to retail investors. Remember, the intention behind preventing retail investors from investing in unregistered securities is to protect those who don’t have the financial means to withstand large losses.