When researching different investment opportunities, you might come across the term “accredited investor.”
This is especially the case if real estate crowdfunding is of interest to you. Some platforms won’t let you participate in certain projects unless you’re an accredited investor.
What is an accredited investor, and how do you become one? Here’s what you need to know:
— What is an accredited investor?
— The criteria of eligibility.
— How to become an accredited investor.
What Is an Accredited Investor?
Accredited investors are assumed to be able to handle the additional risk that comes with assets that aren’t as regulated as publicly traded assets.
In general, securities registered with an authority like the U.S. Securities and Exchange Commission are thought to be suitable for most people — and the disclosures and regulations are meant to add a layer of protection to common investors who might not be able to absorb huge financial losses, or who might not have the technical or professional knowledge to navigate some of the offerings.
As an accredited investor, you’re assumed to have the financial cushion or the expertise and knowledge to handle complex and potentially risky investment transactions. Accredited investors can put their money into assets that aren’t registered with a regulatory authority.
Basically, being an accredited investor allows you access to investments that you might normally be restricted from. Rather than sticking with registered securities, you can use your status to invest in assets that aren’t available to the general public, such as private equity funds, crowdfunding ventures or private placement programs.
In this way, you can diversify your portfolio with alternative investments, as well as get the chance at some serious growth potential.
The Criteria of Eligibility
In order to be considered an accredited investor, you must meet one of the following criteria:
— A high enough income: If you have made $200,000 as an individual (or $300,000 as a married couple) for the past two years, and you expect to make as much in the current year, you can be considered an accredited investor.
— A net worth exceeding $1 million: Your net worth when used as a qualifier, whether married or not, must not include the value of your primary residence.
— Registered brokers and investment advisors: If you can prove that you have enough job experience or professional knowledge in dealing with unregistered securities, you can be considered an accredited investor.
There are also ways for a business entity to be considered an accredited investor, including having assets worth more than $5 million, and if the business’s equity owners are accredited investors.
However, on Aug. 26, 2020, the SEC announced some changes to its regulations concerning accredited investors. The regulatory body acknowledged that the rules above allowed high-income individuals and couples to invest in private markets while seemingly ignoring “institutional and individual investors that have the knowledge and expertise to participate in those markets.”
So the new amendments to the SEC’s rules about how to become an accredited investor are as follows:
— Professional investors: Individual investors with certain professional certifications — specifically the Series 7, Series 65 and Series 82 licenses — will now be considered accredited investors regardless of their net worth.
— Knowledgeable employees: The SEC now allows people who are “knowledgeable employees” of private funds to become accredited investors. This allows private funds to offer equity to employees regardless of their net worth, and includes directors, trustees, general partners and executive officers like presidents and vice presidents. In addition, any employees who “have participated in the investment activities of such (a) private fund for at least 12 months,” excluding those whose work is solely clerical, secretarial or pertains to administrative functions, now qualify as accredited investors.
— Spousal equivalent: “Spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.” Though the SEC already defines the term “spouse” to encompass same-sex marriage, this new definition includes domestic partnerships and civil unions.
The new rules also expanded what kind of businesses can become accredited investors to include limited liability companies with $5 million in assets. This includes SEC- and state-registered investment advisors, exempt reporting advisors and rural business investment companies, or RBICs.
In addition, family offices with at least $5 million in assets under management and their “family clients” will be considered accredited investors.
Finally, the SEC now considers entities like American Indian tribes, governmental bodies, labor unions and funds, as well as entities organized under the laws of foreign countries that own “investments” in excess of $5 million to be accredited investors.
How to Become an Accredited Investor
The good news is that there isn’t any official paperwork to fill out if you want to become accredited.
The SEC isn’t going to come after you and make you fill out a long application. In fact, those in charge of selling the securities are responsible for making sure that you’re eligible for accredited investor status.
However, depending on the issuer, you might have to answer a few questions and provide some documentation. For example, you might have to give the securities seller financial statements or a letter from a certified public accountant verifying your net worth. So even though the government won’t be issuing you a certificate, you still need to prove your status with the entity issuing the securities.
Keep in mind that unregistered securities also come with their own risks. The potential gains can be quite high with these types of investments, but it also means that you could sustain a big loss. As an accredited investor, the assumption is that you have the financial stability, as well as a certain degree of knowledge, to handle any major setbacks.
If you’re considering investing in unregistered securities or thinking about using a real estate crowdfunding platform to find new investment opportunities, take a step back and consider your situation. Make sure that the rest of your portfolio is well-diversified and that you have enough financial resources to absorb losses if they come.
There are a lot of great opportunities out there. Many “regular” investors never get a chance to access some of the hedge funds, real estate projects and alternative investments available. If you have built up your net worth and made an attempt to learn about unregistered investments, you might be able to become an accredited investor — and take advantage of opportunities not everyone is privy to.
Remember that, as an accredited investor, you are taking on more risk and responsibility. Carefully consider where you put your money to work and make sure it’s suitable for your portfolio and your financial situation.
More from U.S. News
Update 09/03/20: This article was published previously and has been updated with new information.