An “accredited investor” is a person or entity with exclusive access to complex, loosely regulated and often opaque investments like hedge funds, leveraged buyouts and startups. To become an accredited investor the Securities and Exchange Commission (SEC) requires certain wealth, income or knowledge requirements. Whether you qualify as an accredited investor or not, a financial advisor can help you manage your investments and meet your financial goals.
What Is an Accredited Investor?
Under SEC law, a company that offers its own securities must register these investments with the SEC before it can sell them unless it meets an exception. One of those exceptions is selling unregistered investments to accredited investors.
According to the SEC, accredited investors have legal access to invest in products not available to the general public. These securities include the following:
So while the ordinary investor may have experience with investing in securities like stocks, bonds and mutual funds, the SEC sees products like hedge funds as entirely different animals. So investors need to demonstrate they can understand the risks involved with these types of investments.
Firms selling unregistered products engage in their own screening process to verify an individual’s accredited investor status.
Requirements for Becoming an Accredited Investor
To claim accredited investor status, you must meet at least one of the following requirements:
- Hold (in good standing) a Series 7, 65 or 82 license
- Have a net worth exceeding $1 million individually or combined with a spouse or spousal equivalent (excluding the value of the primary residence)
- Have earned income exceeding $200,000 ($300,000 if combined with a spouse or its equivalent) during each of the last two calendar years. The individual must also demonstrate credibly that he or she will at least maintain these income thresholds during the current year
However, it’s important to note one specific rule about that last bullet point. You must meet those income requirements based on the same method for all three years: single or joint. So let’s imagine a married individual made $250,000 two years ago, but his wife did not work. Last year, he made $160,000 and his wife earned $200,000 (totaling $360,000). The couple can easily demonstrate it has the capacity to earn the same amount or more this year.
The above example may make it seem like the couple met the requirements to become accredited investors. However, the pair did not calculate income using the same method for all three years. To gain accredited investor status, an individual must meet those thresholds for all three years either individually or with a spouse. The only exception applies if the individual was single and then married or vice versa during that three-year period.
There are also a few other non-traditional categories of accredited investors. These include:
- Entities that are owned by exclusively accredited investors
- Entities with total investments of $5 million or more that weren’t formed to purchase the securities in question
- Trusts with total assets of $5 million or more that weren’t formed to purchase the securities in question. The trust must also be managed by a “sophisticated person,” meaning someone who has “sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investments,” according to the SEC website
How Do Firms Determine If You’re an Accredited Investor?
In 2013, the SEC put out some guidelines to help firms confirm an individual’s accredited investor status. Those guidelines saw an expansion in 2020. So let’s say you want to invest in an unregistered fund. The firm that manages it may put you through a screening process before it can decide if it can legally let you. It may start with handing you a questionnaire to see if you meet certain qualifications. You can also expect to provide one or more of the following for evaluation:
- Financial statements and details of other accounts
- The credit report for confirming the net worth
- Tax returns
- W-2 forms and other documents indicating earnings
- “Knowledgeable employees” of the issuing fund
- Professional certifications, designations or credentials administered by the Financial Industry Regulatory Authority (FINRA).
Regarding that last bullet point, an investor holding FINRA’s Series 7, Series 65 or Series 82 designations qualifies as an accredited investor.
Who Can be an Accredited Investor?
So far, we’ve discussed accredited investor requirements for individuals. However, certain entities can claim accredited investor status as well.
The SEC defines accredited investors in Section 501 under Regulation D. The following entities who can meet the requirements outlined in this document can claim accredited investor status:
- Brokerage firms
- Employer-sponsored retirement plans
- Certain trusts
- Registered Investment Advisor (RIA) firms
- Limited liability companies with $5 million in assets
- SEC- and state-registered investment advisers
- Exempt reporting advisers
- Rural business investment companies
- Indian tribes, governmental bodies, funds and entities organized under foreign laws
- “Family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act
Accredited Investor Exceptions
As mentioned above, the net worth requirement to claim accredited investor status excludes primary residence. The only exception to this rule applies if you have an underwater mortgage or a home equity line of credit (HELOC).
It’s also important to note that the Dodd-Frank Act introduced the primary residence exclusion. While certain provisions of Dodd-Frank were rolled back during the Trump Administration, the primary residence exclusion remains intact.
Individuals who want to become accredited investors must fall into one of three categories: have a net worth exceeding $1 million on your own or with a spouse or its equivalent; have earned an income surpassing $200,000 ($300,000 if combined with a spouse or its equivalent) during the last two years and prove an ability to maintain this income level; or possess certain credentials, certifications or designations as recognized by FINRA.
As an accredited investor, you can invest in hedge funds and other unregistered securities not available to the general public. Firms selling unregistered securities you’re interested in must put you through their own screening process to determine if you’re an accredited investor.
- As you can see, accredited investors have special access to several complex investment products. If you’re venturing into this area of the investing world, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you don’t qualify for claim accredited investor status, you still have access to a vast universe of investment options. Your options include equities, different types of bonds and real estate.
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