If you’ve looked into different types of investing before you’ve probably heard the term accredited investor but may have been unsure of its meaning. Or perhaps you have a rough idea but aren’t sure what exactly is required to be an accredited investor. Regardless of your existing knowledge about being an accredited investor we’ll give you a high-level run down so you can become more familiar with the prerequisites to be an accredited investor.
If you’re interested in learning more about you can check out this article about accredited investor requirements from ModestMoney.
Accredited Investor Overview
An accredited investor is a person or entity who meets certain wealth and income thresholds or has received professional qualifications relating to financial investing and risk management. The latter is an important distinguishing mark as not everyone working in finance or in a financial job will inherently qualify as an accredited investor. For example, trained accountants won’t normally qualify as accredited investors unless they’ve taken additional exams or meet the financial thresholds.
To put it another way, accredited investors are required to have a certain amount of wealth. The term “high-net-worth individual” (HNWI) and “ultra-high-net-worth individual” (UHNWI) are sometimes used to refer to these individuals. Or have specific investment knowledge as set out by the U.S. Securities and Exchange Commission (SEC).
Now you might be thinking why does any of that matter. Which is a valid and fairly common question when you consider accredited investors are typically the only source of investment for early-stage businesses seeking capital. Meaning they get the highest returns. Additionally, accredited investors have the privilege of trading securities that may not be publicly traded or have not been registered with financial authorities. To many this can seem like a type of financial discrimination that heavily favors’ the already wealthy.
The reality is a bit more complex.
Why The Difference Between Retail and Accredited Investors?
If you’re not classified as an accredited investor, you’ll be categorized as a retail investor. The reason for the difference is all hinged fundamentally on one thing, risk. Accredited investors can access more risky investments which have a greater chance of failing, but also can have greater returns. Because most start-ups fail, and real-estate money can be tied up for years with major price swings, the SEC doesn’t want to open up deals that might financially hurt investors who can’t afford the downside.
As a result of the extra risk the SEC has strict compliance on what it takes to be considered an accredited investor.
The Requirements for Individuals
As an individual there are two basic ways in which you can become an accredited investor.
The first way is through income and wealth. to be classified as an accredited investor through these means you’ll need a net worth of more than $1 million, excluding a primary residence. Meaning the house, you live in can’t be used for that calculation and any outstanding loans on other physical assets will be deducted from the calculation. However, it’s $1 million for either you as an individual or you and your spouse or partner. There are some ways in which individuals do end up adding their primary residence as a countable asset, namely through a complex holding strategy, but at a high level it cannot be used, while a vacation home can be.
If you don’t have $1 million worth of assets the other financial way to automatically be considered an accredited investor is to have a yearly income of at least $200,000 (individually) or $300,000 (joined with a partner) for the previous two years, with an assumption of the equivalent for the ongoing year.
For those that don’t meet the income criteria you can become an accredited investor through professional exams. These include a general securities license (Series 7), investment advisor license (Series 65), or private securities offering license (Series 82). On top of that if you’re a GP or executive of a fund or family office, or you’re a “knowledgeable employee” you could potentially be considered an accredited investor.
Entities
Entities can also become accredited investors and if you’re curious as to how that works you can see the article linked above.
I Might Be Accredited, What Should I Invest In?
So, if you are already an accredited investor or are planning on working towards it, you might be curious as to what you can invest into and where you can invest. There are a variety of sources as essentially the entire financial market opens up to you, but for specific platforms you can check out this article about the investment opportunities for accredited investors.
The overwhelming majority of publicly available deals for accredited investors are in real estate. As they have large price tags and organizations tend to prefer to have investors instead of bank loans. As a result, there are a lot of platforms that allow you to invest in real estate, many of which will allow you to do some sort of real estate investing even if you’re not accredited just yet. If you’re interested in that you should read this article on crowdfunding real estate reviews.
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