How to Become an Accredited Investor

Accredited investors invest in securities that are not registered with financial regulatory agencies. They are able to invest money directly in companies like private equity funds, equity crowdfunding firms, venture capital firms, hedge funds, and other private placement deals. In the United States, the Securities and Exchange Commission (SEC) sets the accredited investor criteria, which determines who can and who cannot be an accredited investor based on an investor’s measure of professional knowledge, experience/certifications/credentials, net worth or income.

Accredited investor definition: An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.

Benefits of Being Accredited Investor

Benefits of being an accredited investor include:

  • Increased diversification that helps to build wealth in a short time frame
  • An accredited investor is guaranteed high returns
  • Access to unique and restricted investments

Cons of Being an Accredited Investor

Although being an accredited investor is highly lucrative, it also comes with a number of drawbacks, including:

  • High minimum investment amounts
  • High performance fees
  • High-risk investments
  • Illiquidity of the investments

Who Can Be an Accredited Investor?

In the US, the SEC defines those who can claim accredited investor status in Regulation D, Rule 501 of the 1933 Securities Act. They include individual investors, spouses, or investment firms such as banks, brokerage firms, rural business investment companies, certain trusts, limited liability companies with $5 million in assets, and SEC- and state-registered investment advisers. Other entities include Registered Investment Advisor (RIA) firms, Indian tribes, government bodies, funds and entities organized under foreign laws, family offices with at least $5 million in assets, employer-sponsored retirement plans, etc.

Accredited investor vs qualified purchaser: An accredited investor has lower financial thresholds (measured in terms of net worth and income) compared to the financial threshold that a qualified purchaser needs to achieve (measured in terms of investments).

Accredited Investor Requirements

There is no set process showing how to be an accredited investor. Instead, companies that sell unregistered securities must put you through their accredited investor verification to determine if you qualify as an accredited investor. The company will give you an accredited investor questionnaire that you must fill out listing your income, assets, and liabilities. You must meet at least one of the following accredited investor requirements:

  • The potential accredited investor net worth or joint net worth (with your spouse) must exceed $1 million at the time of the purchase. This should exclude the value of your primary residence. To calculate your net worth, take your total liabilities and subtract them from your total assets. You will not include the value of your primary residence unless you have either an underwater mortgage or a balance on a home equity line of credit.
  • You must have an individual income that exceeds $200, 000 or joint income with a spouse that exceeds $300, 000 during each of the two most recent years. You must also demonstrate your ability to at least maintain these income thresholds in the current year.
  • You must have certain professional certifications, designations, or have a status that shows you are a knowledgeable employee. You must be in good standing with the Series 7, Series 65, or Series 82 licenses.

Enroll for Series 65 Coure

Since investments are associated with risks and losses, the accredited investor qualifications are set high as a measure of protection. These requirements limit risky investments to wealthy investors who can withstand significant risks and losses.

New SEC definition of accredited investor: New SEC rules announced in August 2020, a new category was created, which allows a natural person to qualify as an accredited investor in the US based upon their professional certifications, designations or other credentials even if they would not qualify on the basis of their income or net worth.

Documents Required to Determine Accredited Investor Eligibility

To verify that you meet the requirements to become an accredited investor, firms managing investment opportunities will require you to provide documentation that demonstrate your accreditation status. The documents include the following:

  • Recent bank and brokerage statements that identify you as the owner of the assets and clearly state the value of the assets
  • Tax returns, W-2 forms, and other documents that indicate wages (for qualifications based on annual income)
  • Proof of knowledge or professional certifications from certified educational institutions
  • Credit reports for confirming net worth or disclose liabilities

Accredited Investors in Other Countries

The requirements to become an accredited investor in Singapore, Canada, and Australia are similar to those in the United States in terms of net worth and income requirements, while other countries have differing requirements.

Accredited investor in Canada must meet the requirements listed here.

In the European Union and Norway, individuals, spouses, or entities must undergo a qualitative test, quantitative test, and put in writing that they want to be treated as professional clients by the company they want to work with.

The qualitative test evaluates your expertise, knowledge and experience. This determines whether you can make your own investment decisions.

The quantitative test ensures that you meet two of the following criteria:

  • You must be working, or must have worked in the financial sector for at least one year
  • Your financial portfolio must exceed EUR 500, 000
  • You must have carried out an average of 10 transactions of significant size per quarter over the previous four quarters

Accredited investor in UK: To be an accredited investor in the UK, you need to earn at least 100,000 GBP a year or have at least 250,000 GBP in assets excluding pensions and property (your primary residence).

Accredited Investor Opportunities

Knowing accredited investor requirements, it is important to know the best accredited investor investment opportunities. They are the following:

  • CapitalRise
  • BulkEstate
  • PeerBerry
  • Viventor
  • Ablrate
  • Wisefund
  • Crowdestate

The Series 65 is an exam and securities license required for individuals to act as investment advisers in the US. The Series 65 exam covers laws, regulations, ethics, and various topics important to the role of a financial adviser.

Enroll for Series 65 Course

Final Thoughts on How to Be an Accredited Investor

Accredited investors are typically wealthy individuals. To become a US accredited investor, you will need to meet certain requirements regarding qualifications, income, or net worth. SEC has put in place guidelines that help entities or individuals to confirm if they qualify as accredited investors.

Crispus (BSc and MBA) is a finance professional with more than a decade experience as a financial analyst, writer, researcher, and trader. Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, Investing Cube and Seeking Alpha. He also runs a forex education firm. Follow him on Twitter: @crispusnyaga and read more about us.