Are you looking for information on becoming an accredited investor in the U.S.? Here we’ll explore the accredited investor definition, the requirements for becoming an accredited investor, and the assets in which you can invest.

Understanding Accredited Investor

An accredited investor is an individual or entity that can invest in various private securities offerings, which are not registered with the Securities and Exchange Commission (SEC). Such an investor has exclusive access to loosely regulated and complex investments like leveraged buyouts, start-ups, and hedge funds. As per the SEC, an accredited investor must meet one of the following requirements:

• Skills: Must possess a good knowledge of certain investment funds or holdan authentic Series 7, 65, or 82 license.
• Income: Must have an annual income of at least $200,000 or $300,000 if integrated with the spouse’s income for each of the last two calendar years. It should be sustained for the current year also.
• Net Worth: Must possess a net worth of $1 million or more, either combined with the spouse or individually, but excluding the primary residence’s value.

For the second bullet point, which is “Income”, the same requirements should be maintained. For instance, a married person made $245,000 two years ago and his wife was a homemaker. In the last year, he made $170,000 and his wife earned $210,000, totaling $380,000. Therefore, the couple can easily highlight their competency to earn the same amount or more for the current year.

In this above example, it might seem that the couple met the “Income” requirements for becoming accredited investors. However, they failed to calculate their income utilizing the same method for all three years. To gain the status of an accredited investor, a person must meet the thresholds for three consecutive years either with a spouse or individually. The only exception is if the person was single and then married or vice-versa during that three-year time.

So, what’s the purpose behind becoming an accredited investor? These strict criteria ensure protection for investors who might lack the cash reserves to overcome significant losses. It further ensures that the investor has adequate knowledge to understand the risks associated with the investment.

What Assets Can Accredited Investors Purchase?

An accredited investor may invest in the following assets:

• Angel investments
• Venture capital
• Private equity funds
• Hedge funds
• Real estate investment funds
• Specialty investment funds such as those emphasizing cryptocurrency

These entities sell investors securities known as private placements or Regulation D (Reg D) offerings. Unlike the Federal Reserve’s Regulation D, which applies to savings accounts, the SEC’s Reg D rules exempt certain securities from SEC regulations.

When registering a Reg D offering, a corporation needs to provide basic information about its location, executives, and the offering itself. The company issuing the private placement is solely responsible for any additional information that an investor may receive.

In comparison, a firm issuing public stock must go through a lengthy application procedure with the SEC to ensure that the company has been truthful and has made all legally required disclosures.

How Do Companies Verify an Accredited Investor?

Although the criteria to become an accredited investor are stringent, there is no federal verification procedure. It depends on the company to verify the status of accredited investors of prospective partners before permitting them to invest.

It’s usual for accredited investments to ask for network and income verification like investment or bank statements, tax returns, and proof of employment or security licensing. Remember, the value of your primary residence is not counted for net worth requirements.

Who Can Become an Accredited Investor?

So far, we have discussed accredited investor requirements for an individual. Besides this, there are specific entities that can claim this status as well. These include:

• Banks
• Certain trusts
• Brokerage firms
• LLCs with $5 million in assets
• Employer-sponsored retirement plans
• Rural business investment firms
• Registered Investment Advisor (RIA) firms
• Exempt reporting advisers
• SEC-investment advisers
• Indian tribes, funds, government bodies,and entities organized under foreign laws

There are certain exceptions for accredited investors. As stated above, a primary residence is not included under the net worth requirement for claiming accredited investor status. The only exception to this guideline applies if you have a home equity line of credit (HELOC) or an underwater mortgage.

Keep in mind that the Dodd-Frank Act introduced the exclusion of primary residence. Although some provisions of this Act were rolled back during the Trump Administration, the exclusion of primary residence still remains intact.

How Can You Invest in Start-Ups?

Accredited investors have a variety of possibilities for investing in startups. They do this through a venture capital (VC) company or by searching an online marketplace for private placement offerings.

Accredited investors invest in a venture capital fund, and the firm subsequently invests the fund’s proceeds in a variety of start-ups. There is always restricted liquidity in a VC fund, which means you won’t be able to withdraw your money whenever you want. Accredited investors should always understand a VC fund’s investment horizon and be aware of the risks involved.

How Do You Invest in Hedge Funds?

A hedge fund is a type of investment vehicle in which fund managers spend money on different investments to “chase alpha,” or earn positive returns. The purpose of a hedge fund is to generate positive returns irrespective of market conditions.

Investing in a hedge fund might be a hassle. You can’t simply call a hedge fund or invest through an online brokerage. You usually have to know someone at the fund, and the verification process can be rigorous. Like venture capital investments, hedge funds have very low liquidity, and investment minimums can be extremely high.

Management costs for hedge funds can be substantial as well. Along with an expense ratio, fund managers often receive 20% of the fund’s profits, substantially reducing an investor’s gains.

Accredited individuals can also invest in funds of funds, which are designed to imitate mutual fund diversity. Funds of funds typically invest in several other mutual funds or hedge funds. Funds of funds have similar fees as hedge funds, and their returns can be monitored and benchmarked using the Barclays Fund of Funds Index.

Bottomline

Thus, people willing to become accredited investors must fall into one of the three categories- have an income above $200,000 or $300,000 if combined with a spouse for the last 2 years and be competent to possess the same for the current year, have a net worth above $1 million, and possess certain complex financial skills. You can invest in hedge funds or start-ups as an accredited investor.

If you are looking for investment options as an accredited investor, reach out to a financial advisor today. At Basta & Company, we ensure that you invest in the right options for long-term success. Get started now!