Accredited investors. You may have heard of them, but how do you become one and what are the benefits?
An accredited investor is someone who is recognized by the Securities and Exchange Commission (SEC) as financially smart and capable enough to take greater investment risks without protections provided by regulatory disclosure filings, like a practiced acrobat jumping without the safety net. The SEC is an independent agency of the United States federal government.
Accredited investors are allowed to deal in securities that are not registered with financial authorities, thus assuming much more risk than a regular investor.
How do you become one? In the US, an accredited investor must have an annual income of over $200,000 ($300,000 for joint income) for at least two years or have a net worth exceeding $1 million. For private businesses and organizations, their assets need to exceed $5 million.
General partners, executive officers, and other specific positions can also be considered accredited investors. You can also qualify if you demonstrate sufficient job experience or knowledge on unregistered securities.
You can find the SEC’s complete list of requirements in Rule 501 of Regulation D but there is actually no formal process, registration, or certification required to become one. Once you meet the requirements, you are already in. The only real verification beyond the SEC definition is proving to a securities issuer that you are the real deal when you show up and start asking about investments.
In addition to the SEC, every state has its own set of securities laws as it relates to non-registered investments.
What is the benefit? Accredited investors have more money options because they can deal in non-registered investments like private equity funds and venture capital firms. The special allowance exists because, per the SEC’s logic, if you have enough money to be accredited, you probably know what you are doing and can afford to lose a little cash if an investment goes south.
For everyone else, however, there are plenty of moneymaking options outside of non-registered securities. You can still make your millions without ever having to use the riskier investments to which accredited investors have privileged access.