How to become an accredited investor: Eligibility and benefits explained
Many people may have heard the words “accredited investor” but never had to worry about what they mean or whether they qualify as one.
When you open a brokerage or other investment account, the brokerage will likely check to see if you’re an accredited investor, but your status only comes up in very specific situations.
Most people won’t know whether they’re an accredited or non-accredited investor until they find out the hard way by getting denied an investment opportunity.
In short:
The difference between an accredited and non-accredited investor lies in their annual income and net worth.
If you want to know more about accredited investors and what that status means, this article will cover the important pieces of information.
Accredited investor opportunities: What is an accredited investor?
An accredited investor is anyone who meets the requirements laid out by the federal government. The accredited investor definition is important because it determines which individual or entity is eligible to participate in certain private investment opportunities, based on specific financial and professional criteria.
There are two ways to qualify as an accredited investor:
1. Income
To qualify as an accredited investor based on your income, you must have earned more than $200,000 in each of the past two years and expect to do the same for the current year.
For people married filing jointly, the threshold is $300,000.
Meeting the income or net worth requirements grants you the designation of accredited investor.
2. Net worth
To earn accredited investor status based on your net worth, you must have a net worth (alone or with your spouse) exceeding $1 million, excluding the value of your primary home.
Meeting either of these requirements is sufficient to qualify as an accredited investor.
You do not have to meet both the income and net worth requirements.
What is a non-accredited investor?
A non-accredited investor is anyone who does not meet the requirements to be an accredited investor.
Not surprisingly, the vast majority of Americans are non-accredited investors.
Accredited investors' access to different investments
Non-accredited investors have many investment options available to them. They can purchase stocks, bonds, mutual funds, ETFs, and a huge variety of other securities. However, some types of investments are only made available to accredited investors, often through vehicles such as partnerships.
For example, only accredited investors can participate in real estate crowdfunding investments. These types of investments let many individuals pool their funds with other investors to invest in real estate projects, such as large-scale commercial properties like apartment buildings or shopping malls. Real estate crowdfunding and syndications provide exposure to properties that would otherwise be inaccessible to individual investors.
Accredited investors can also participate in venture capital or certain investing portals and platforms. Venture capital opportunities allow accredited investors to invest in early-stage companies, providing capital to startups and emerging businesses with high growth potential.
Generally, hedge funds and private equity funds are also restricted to accredited investors. Non-accredited investors cannot purchase shares in these funds. Hedge funds and private equity funds often charge high fees, such as management and performance fees, which can impact overall returns. Many hedge funds have had a hard time beating the market, adding to the complexity of these investments. These investments typically require a significant time commitment, with lock-up periods that can range from one to several years, limiting an investor's ability to withdraw their capital. Private equity firms play a key role in acquiring private companies, seeking to improve their performance for profitable exits, and accredited investors can gain exposure to these strategies through private equity funds.
Reasons for accredited-investor rules
The Securities and Exchange Commission (SEC) created the accredited investor rules to protect individuals from the high risk associated with certain types of investments. Accredited investors access private equity, hedge funds, and other exclusive opportunities that are not regulated in the same way as public securities. These investments can be complex and may expose participants to significant potential losses. The regulation is intended to ensure that only those who meet specific criteria—such as having a high income or net worth—can accept and manage these risks. By defining who qualifies as an accredited investor, the SEC aims to prevent individuals from participating in investments they may not fully understand or be financially prepared to handle. This approach helps safeguard people from making decisions that could jeopardize their financial well-being, while still allowing knowledgeable and financially secure investors to participate in private markets.
How investors are protected
There are many regulations dedicated to keeping investors protected.
Accredited investor rules are part of these regulations. These rules apply to individuals, directors, corporations, partnerships, and trusts, ensuring that a wide range of entities are considered when applying financial or regulatory criteria.
By limiting investment in complex securities to those with more experience, knowledge, and more resources to weather losses, the government helps protect people who don’t understand the things in which they invest. Investors must also maintain a net worth of $1 million or more, excluding their primary residence, to remain accredited. The importance of investor knowledge is emphasized, as it is crucial for making informed investment decisions.
Other regulations, such as requiring publicly traded companies to file regular reports with the SEC, help to protect investors because it ensures that they have easy access to important company data, such as revenue and profits. It is also important to check for any regulatory order or enforcement action against an investor, as these can impact their eligibility and compliance status.
There are different categories of investors, each with specific protections and requirements under SEC regulations. Comprehensive educational content is available from the SEC and other sources to help investors understand these protections and requirements.
There are other groups, like the Securities Investor Protection Corporation (SIPC), that offer protection to regular investors.
SIPC insurance protects up to $500,000 worth of holdings at a protected brokerage. This insurance reimburses investors for losses incurred due to a brokerage’s failure (not loss of investment value). The protection doesn’t extend to investment losses.
Due diligence for accredited investors
For accredited investors, performing due diligence is essential before committing to any investment, especially those involving high risk or complex structures like private equity. Accredited investors should thoroughly evaluate each opportunity by reviewing financial documents such as balance sheets, income statements, and cash flow reports to assess the company’s operations and overall financial health. In addition, it’s important to research the management team’s experience, the industry’s outlook, and the competitive environment to get a complete picture of the investment’s potential. For example, when considering a private equity deal, accredited investors should look at the company’s growth strategy, revenue projections, and possible exit options to estimate potential returns. Consulting with registered investment advisors or other financial experts can also provide valuable insights and help accredited investors make informed decisions. By taking these steps, accredited investors can better assess the risks and rewards, increasing their chances of achieving their investment goals while minimizing the likelihood of unexpected losses.
How to become an accredited investor
There is no special process for becoming an accredited investor.
You don’t have to submit an application or register with any organization.
Once you meet the requirements for being an accredited investor, you automatically become one.
The SEC's regulations establish and periodically update the criteria for accredited investors, which now include not only individuals meeting income or net worth thresholds, but also other categories such as certain entities, knowledgeable employees, and those holding specific professional licenses.
If you want to make investments that are only available to accredited investors, the companies facilitating those investments, such as your brokerage or crowdfunding sites, need to verify your status.
That typically means that you'll have to provide information such as financial statements, tax returns, or other documents included in the verification process to prove that you meet one of the requirements. Holding certain securities licenses, such as Series 7, Series 65, or Series 82, can also qualify you as an accredited investor under the SEC's latest amendments.
Rules
Achieving accredited investor status is an official designation that requires meeting specific criteria. The only restrictions are related to the investment options, such as hedge funds and private equity, that accredited investors can take advantage of, but non-accredited investors cannot invest in.
Expertise in finance or investments can help an individual qualify as an accredited investor, as regulations in the EU, Norway, and other countries often assess an individual's knowledge, experience, and professional qualifications. Additionally, knowledgeable employees of certain financial institutions may also qualify as accredited investors due to their professional expertise and experience.
Why become an accredited investor
Becoming an accredited investor opens up new investment opportunities. You can construct an effective portfolio using things like stocks, bonds, mutual funds, ETFs, and real estate investment trusts (REITs). There’s no requirement that you qualify as an accredited investor if you want to make money while investing.
Still, some of the special opportunities afforded to accredited investors can be appealing.
Real estate crowdfunding, for example, gives accredited investors close control over how their money is used to invest in real estate, whereas investing in a REIT affords much less control. In these deals, investors can choose specific types of property, such as commercial or multi-family properties, to invest in. The success of these investments often depends on the sponsor or syndicator managing the property and overseeing the project, making their experience and management skills crucial for investment outcomes. This gives accredited investors more power to direct their investment, which can help them earn higher returns (or make them lose more money).
Becoming an accredited investor doesn’t close any doors in the world of investing. Accredited investors can invest in the same things that non-accredited investors can. It only provides more choices, making it understandable that people want to become accredited investors.
Bottom line
The accredited investor rule is designed to help protect regular investors from investing in complex investments.
By restricting access to confusing investments like hedge funds, private equity, and real estate crowdfunding, the government can help less sophisticated investors or those who can’t afford large losses from losing money on investments they don’t understand.
Qualifying as an accredited investor requires a high income or net worth, but opens up some new investment options that you may find worth consideration. For example, accredited investors can access opportunities such as hedge funds, private equity, and venture capital funds, which are not available to non-accredited investors.
Frequently asked questions
How do you qualify as an accredited investor?
To qualify as an accredited investor, an individual must have a net worth of over $1 million (excluding their primary residence) or an annual income of over $200,000 ($300,000 with a spouse) for the past two years. This designation, which also includes individuals with certain professional certifications, allows access to private investment opportunities.
What professional certifications allow you to become an accredited investor?
You can qualify as an accredited investor by holding certain professional certifications in good standing. The specific certifications currently recognized by the SEC are the Series 7, Series 65, and Series 82 licenses, which demonstrate a level of financial knowledge and expertise.
How much does it cost to be an accredited investor?
There is no direct cost or fee to become an accredited investor. The status is based on meeting specific financial criteria, such as having a net worth of over $1 million or an annual income of over $200,000 for the past two years, or by holding certain professional certifications.
Is it worth becoming an accredited investor?
Becoming an accredited investor can be worthwhile if you want access to a wider range of investment opportunities, like private equity and hedge funds, which can offer higher returns and diversification. However, it's only suitable for those who can tolerate the higher risks and illiquidity associated with these investments.
What is the minimum income for an accredited investor?
To qualify as an accredited investor based on income, an individual must have earned over $200,000 in each of the two most recent years. For a joint income with a spouse, the minimum is over $300,000 for the same period. In both cases, there must be a reasonable expectation of earning the same or a higher income in the current year.
