What is an Accredited Investor?
An accredited investor is an individual (or a business entity) who invests in certain securities. Those securities may not be registered with the Securities and Exchange Commission (SEC). Therefore, they are usually not available to the general public. Accredited investors have this opportunity, mainly because accredited investors are sophisticated individuals.
Accredited investors have a high net worth, have a sizeable income, and understand the risks in those securities, and are able to sustain the loss. Thus, because of those characteristics, accredited investors do not necessarily need the protections from the SEC. Accredited investors can receive high returns on their investments. However, the risk is high.
To become an accredited investor, you just need to satisfy at least one requirement (see below). But, overall, accredited investors include individuals with high net worth, banks, brokers, and insurance companies. Whether you qualify as an accredited investor or not, a financial advisor can help you manage your investments and meet your financial goals.
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Understanding Accredited Investors?
An accredited investor is an investor (individual or entity) who is eligible to invest in many early stage companies, hedge funds, etc. Some of the companies that an accredited investor may invest in include venture capitals, angel investments, real estate investment funds, private equity funds, hedge funds, specialty investment funds, etc.
These companies may not be regulated and therefore are exempt from the regulations that protect regular investors from the risks involved. So, an accredited investor is allowed to invest in these unregulated securities, because they are sophisticated, have money, and know how to handle the risks involved.
Thus, the definition of an accredited investor is someone who has a high annual income, has a high net worth, or is a knowledgeable employee of certain investment funds.
Accredited Investor Requirements
The SEC imposes the requirements to become an accredited investor. To become an accredited investor, you just need to satisfy one of the requirements below. In terms of an individual,
- Your annual earned income must exceed $200,000 in each of the prior two years and you should expect to earn the same for the current year. If you have a spouse, then your combined income should be $300,000 (also remember that you must meet the income requirements based on the same method for all three years, i.e., single or joint), Or
- You have a net worth exceeding $1 million, either alone or together with a spouse, excluding primary residence, Or
- You are an accredited investor if you are a general partner, executive officer, or director for the company that is issuing the unregistered securities.
In terms of an entity, it can qualify as an accredited investor if it is:
- an entity owns investments in excess of $5 million;
- Entities with assets in excess of $5 million: corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family office” and any “family client” of that office;
- Entities where all equity owners are accredited investors;
- Investment advisers (SEC- or state-registered or exempt reporting advisers) and SEC-registered broker-dealers;
- A bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company.
How to Become an Accredited Investor?
You don’t need to have a license or certification from the SEC to prove that you are in fact an accredited investor. It is up to the companies selling you the investments to take steps to verify your qualifications. They will likely need your bank and investment statements, your tax returns, W-2s to show your current net worth (excluding your primary place of residence). If you want to explore the options available to you as an accredited investor, reach out to a financial advisor to start a conversation.
Why Is It Important to Become an Accredited Investor?
As an accredited investor, you have the chance to invest in countless investment opportunities that are not available to the regular investors. Regular investors invest in publicly traded stock, bond, mutual fund or publicly traded real estate investment trust, or REIT. While, they can be risky too, the SEC provides protection. Whereas, with accredited investors, they are investing in potentially riskier investments, but the rewards are very high.
One thing you should note too is that management fees for these investments, especially hedge funds, can be very high. Typically, fund managers earn 20% of the funds return. That can eat away any potential gains you can make.
Regardless of your net worth, it’s important to always do your own due diligence. As with any investments, you can lose some or all of your money. Can you afford to lose all of your money? Can you stomach the risks? These are some questions you should ask yourself.
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