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What is an accredited investor — and should you become one?
Accredited investors can participate in specific investment opportunities that others can’t — but not everyone is eligible to become one.
Qualifying as an accredited investor opens the door to investment opportunities that are generally not available to other investors. These investors must meet stringent income and net worth thresholds. Or they must hold specific professional designations to demonstrate they have the knowledge and expertise to participate in these more complex offerings.
As an individual, an accredited investor must meet one of the following criteria:
- Income. Individuals who earned income in excess of $200,000 — or $300,000 together with a spouse or domestic partner — in each of the prior two years and expect the same for the current year.
- Net worth. Individuals with a net worth over $1 million, either alone or together with a spouse or domestic partner.
- Financial professional licenses. Holders in good standing of the Series 7, Series 65 or Series 82 licenses.
- Specific employees of private funds. An employee deemed to be a “knowledgeable employee,” that is, an employee with demonstrable knowledge of the fund’s offerings.
In addition, entities such as LLCs, Native American nations and wealth management family offices and any trust with at least $5 million in assets qualifies as an accredited investor.
Why it matters
An accredited investor can get access to private capital markets generally unavailable to nonaccredited investors. These include particular real estate investments and offerings by hedge funds, private equity funds and venture capital funds.
That’s because regulators consider accredited individual investors capable of assuming greater risk in manage their investments. The companies and private funds offering them provide different disclosures from those required with SEC-registered investments like stocks, and follow different rules.
As noted by the US Securities and Exchange Commission (SEC), “One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.”
An accredited investor was anyone who met specific income or net worth tests, up until August 2020. But since then, the US Securities and Exchange Commission adopted amendments that added new qualifying investor categories.
2020 SEC changes
The SEC change to its definition of an accredited investor in 2020 expanded eligibility to include institutional and individual investors with the knowledge and expertise to participate in these private markets. With these new changes, the following now qualify as accredited investors:
- Holders of certain professional certifications, designations and credentials, including the Series 7, 65 and 82 licenses
- Knowledgeable employees of a private fund
- Limited liability companies (LLCs) with $5 million in assets
- SEC- and state-registered investment advisers, exempt reporting advisers and rural business companies (RBICs)
- Native American nations and foreign governmental bodies, funds and other entities that own investments in excess of $5 million and that were not formed for the specific purpose of investing in the securities offered
- Family offices with at least $5 million in assets under management
- Spousal equivalents, enabling spousal equivalents to pool their finances to qualify
What firms look for in an accredited investor
It’s up to individual companies offering and selling securities that are SEC-exempt to take reasonable steps when verifying investor accreditation. That can include reviewing:
- Tax returns
- Bank and brokerage statements
- Credit reports
Opportunities for accredited investors
Accredited investors can participate in a number of investment opportunities that aren’t available to nonaccredited investors. Though not exhaustive, these investments include:
- Venture capital
- Hedge funds
- Angel investments
- Private equity funds
- Private placements
Accredited investors can use crowdfunded real estate investing platforms like CrowdStreet and RealCrowd to invest in commercial real estate. They can also invest in private placements, which are offerings of unregistered securities by a company to a limited group of investors. Companies use private placements to raise cash for their growing businesses.
They can also access investment opportunities offered through hedge funds, venture capital and private equity funds. Hedge funds are professionally managed funds, like ETFs or mutual funds, that pool money together to invest in securities and other types of investments but face significantly less regulation. Private equity funds are similar to hedge funds, except that they often invest directly in companies or businesses.
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Pros and cons of being an accredited investor
Qualifying as an accredited investor makes you eligible to invest in private companies and funds.
But it doesn’t automatically provide access to them, nor does it mean you have to — or should — participate in them. Certified financial analyst and Creighton University finance professor Robert R. Johnson reiterated this point. He provided the following advice to the typical accredited investor:
“Everyone wants to be an accredited investor. Who doesn’t want to make more than $200,000 per year or have a net worth of at least $1 million?
My advice to the typical accredited investor is to act like you aren’t one. That is, stay away from investments that are only available to accredited investors.”
As with any investment, it’s up to you to practice your own due diligence. But generally speaking, there really is no downside to qualifying as an accredited investor. It’s rather the investments that you qualify for that pose the greatest risk.
- Participate in investments with higher returns. Accredited investors participating in private placements expect higher returns than stocks or ETFs.
- Diversification. Accredited investors can diversify their portfolios by investing in assets uncorrelated with the stock market, such as commercial real estate.
- Greater risk. Many private placements and exempt offerings don’t have to provide the same disclosures to accredited investors as required with SEC-registered offerings.
- Illiquidity. Certain real estate and private investments have a longer turnover, usually of around four to five years.
- Higher fees. Some investment opportunities afforded to accredited investors come with higher fees. For example, hedge funds typically charge a 1% to 2% asset management fee plus a performance fee ranging between 16% to 20% of realized gains.
How can I invest in real estate without accreditation?
Real estate investing isn’t limited to accredited investors. While these opportunities were limited in the past, new platforms have emerged to open real estate investing to almost everyone. The following crowdfunding and real estate investment apps are available to nonaccredited investors:
Qualifying as an accredited investor opens the door to numerous investment opportunities unavailable to nonaccredited investors. While many of these investments offer higher returns and greater diversification, they come with a unique set of risks. And just because you qualify as an accredited investor doesn’t mean you have to participate as one.
In any case, whether you’re an accredited or nonaccredited investor, exercise due diligence and compare different investing and trading platforms to find investments most suitable for you.
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