What is an Accredited Investor?
If you’re new to the world of investing, you may have heard the term accredited investor and wondered what that meant. Does this mean that you have to first be accredited before you can start investing? Not quite.
Let’s take a closer look at what it means to be an accredited investor and how it works.
What is an Accredited Investor?
An accredited investor is an individual or business that is permitted to trade securities that are not registered with the U.S. Securities and Exchange Commission (SEC). This rule is meant to ensure that investors have the means to invest in riskier investments and withstand losses. After all, investments that are not registered with the SEC are inherently higher risk.
Accredited investors can include high net worth individuals, insurance companies, banks, trusts and brokers.
Many companies choose to offer securities directly to accredited investors. Taking this approach allows companies to be exempt from registering securities with the SEC, which saves them money. These types of shares are known as private placement, and they come with great risk. The accredited investor title ensures that these investors are experienced, knowledgeable and financially stable. They understand the risks and can weather the storm, financially speaking, if things go awry.
Accredited investors also have special access to hedge funds, venture capital, angel investments and other complex, high-risk investments.
Requirements to Become an Accredited Investor
In order to become an accredited investor, you must meet several requirements, including:
- Earned income of over $200,000 for individuals or $300,000 for married couples in each of the last two years, OR
- A net worth of over $1 million, individually or with a spouse (excluding the value of their primary residence)
A person may also be considered an accredited investor if they are the executive officer, general partner or director of the company issuing the unregistered securities.
A legal entity can be considered an accredited investor if it’s a private business or organization with more than $5 million in assets.
As of 2016, accredited investors also include investment advisors and registered brokers.
There is no certification to prove that you’re an accredited investor. Companies that are offering investments to accredited investors must verify that you qualify. This means providing financial statements, such as bank statements, tax returns or brokerage statements, to prove your net worth or qualifying income.
Why Do You Need to be an Accredited Investor?
It’s important to note that you don’t have to be an accredited investor to make investments. But this designation will give you the ability to invest in riskier investments that not everyone has access to.
The reason for the accredited investor designation is to ensure that only those with the knowledge, experience and financial stability can invest in the high-risk investments not registered with the SEC.
Regulators must protect individual investors who may not have the knowledge or financial stability to handle a significant loss. So, the accredited investor classification is available to allow the right investors to place a stake in these higher-risk investments while still protecting individual investors who do not qualify.