An accredited investor is an investor deemed more sophisticated in terms of knowledge, skill, and/or wealth than the average investor. As such, the accredited investor has access to a broader array of investment opportunities, such as venture capital, hedge funds, private equity, and private real estate. These investments are not subject to SEC registration, and they, along with the markets in which they trade, tend to be less transparent, less liquid, and riskier than public markets and publicly traded investments, but they have the potential to deliver greater returns.
How to become an accredited investor is important to understand if you want to participate in these potentially more profitable investments.
Accredited Investor Requirements
The SEC has established accredited investor status qualification requirements for individuals based on income, net worth, and expertise. The prospective accredited investor must meet one of these common requirements to qualify.
1.Income
An individual’s income must exceed $200,000 USD for each of the previous two years and is expected to remain at the same income level or greater in the current year. The income requirement for a couple to meet the accredited investors status is $300,000 USD for each of the previous two years.
By meeting the income thresholds of $200,000 USD or $300,000 USD, you are considered in a better position to absorb the risks associated with unregulated markets and investments.
2.Net Worth
An individual or spouse or spousal equivalent’s net worth must exceed $1 million USD, not including the value of the primary residence. If an entity, such as a trust, is to qualify as an accredited investor, it must have assets in excess of $5,000,000 USD.
Net worth equals assets minus liabilities. The net worth requirement of $1 million USD without including the primary residence is thought to place the investor in a safer position to manage the investment risk. The assets in the net worth calculation can include bank and investment accounts such as retirement accounts.
The liabilities in the net worth calculation can include home equity loans, car loans, student loans, and other loans and debt. It can also include any amount of your mortgage which exceeds the value of your home – the “underwater” portion of your mortgage.
3.Expertise
Beyond the financial methods for how to become an accredited investor, an individual can demonstrate the necessary expertise to qualify by possessing a current Series 7, 65, or 82 licenses. A knowledgeable employee of an investment fund may also qualify.
Beyond the Series 8, 65, and 82 licenses, the SEC has opened the door to potentially adding other certifications that would qualify one as an accredited investor.
Knowing how to become an accredited investor through one of the methods mentioned above can help you gain access to investment opportunities that open the door to greater returns in the future. However, it is important to carefully evaluate any opportunities for risk.
