Test Post -> Accredited Investor Status - Am I an Accredited Investor?

With 10.6% of U.S. households accredited in 2020, it's no wonder more and more people are interested in becoming accredited investors. One common reason that attracts individuals to this is the way an accredited investor can trade securities not registered with the Securities and Exchange Commission (SEC).

In this article, we will help you learn what an accredited investor is, the standards for becoming one, and how to obtain accreditation as an investor.

What Is an Accredited Investor?

An accredited investor is a person or entity with the wealth and income to buy high-risk, high-return investment options.

In fact, accredited investors have opportunities to make more money than ordinary investors. That's because they can purchase unregistered investment assets from certain companies that trade them.

Being an accredited investor has a few pros and cons to be aware of. According to Investopedia, an accredited investor will have:

Pros

• Access to restricted and unique investments
• High investment returns
• Increased portfolio diversification

Cons

• High risk, high minimum investment amounts
• Incur high investment fees
• Illiquidity of investments

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Not everyone can become an accredited investor. The SEC has set clear requirements to ensure that accredited investors are able to bear the risks of unregulated investments. These criteria are outlined below.

How an Individual Can Become an Accredited Investor

According to the SEC on Investor.gov, in order to qualify as an accredited investor, you must fulfill one of the following criteria:

• You must have at least $1 million in combined liquid and financial assets, not including your primary residence.
• You must have an annual income of at least $200,000 in the last two years and expect to gain the same amount or more in the current year.
• If you are married, your joint income must be at least $300,000. You and your spouse must also expect to generate the same or more income in the current year.
• You must be a “qualified purchaser.” A “qualified purchaser” is someone who is in compliance with Section 230.501 of Regulation D under the Investment Company Act of 1940. Learn more about this rule in the SEC document here.

These requirements help ensure that accredited investors have the financial savvy to make informed decisions and have the means to bear the significant risk of financial loss (SEC, Investor.gov).

How Entities, Groups, or Organizations Can Become Accredited

Other than individual investors, entities, groups, or organizations can be considered accredited investors. The qualifications they must meet are different from those of individual investors and depend on the assets or the structure of the entity.

Entities, groups or organizations can be classified as accredited investors if they meet one of the following criteria:

• The entity, group, or organization has investments in excess of $5 million.
• The entity, group, or organization has assets in excess of $5 million.
• All of the equity owners are accredited investors.

Why Is Becoming an Accredited Investor Attractive?

Being an accredited investor offers a lot of benefits to an individual investor. Here are some of the most attractive ones:

More Investment Opportunities

One primary advantage you will gain is more access to investment opportunities. Because these are seen as high-risk investments, they are not normally available to the general public. These investments include:

• Venture capital and private equity
• Hedge funds
• Real estate investment trusts (REITs)

Investing in Securities

Another benefit of becoming an accredited investor is the ability to invest in unregistered assets, which are not regulated by the SEC.

The SEC allows entities, groups, and organizations to avoid SEC registration if they only sell their securities to accredited investors. Although these unregistered securities carry greater risk, they also have greater potential for growth.

Lower Minimum Investment Requirements

Certain investment opportunities have a minimum investment requirement. If you're an accredited investor, the minimum amount you need to put down is usually lower than that required of a non-accredited investor.

For example, SEC Rule 504 allows an accredited investor to invest in unregistered securities with a minimum investment of $500,000.

Less Strict Regulations

Lastly, as an accredited investor, you will have fewer restrictions and regulations from the SEC.

Accredited investors are not subject to the same rules and regulations as non-accredited investors when it comes to investing in certain types of securities. Read the SEC's Accredited Investor Definition for more information.

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Types of Investments Available for Accredited Investors

Now that you know the benefits, we are going to take a look at some of the types of investments that are only available for accredited investors.

Venture Capital Investment and Private Equity Firm

A limited selection of investment options is accessible to accredited investors, such as private equity and venture capital financing. However, these options are mostly high-risk, high-reward investments.

The difference between these two is that private equity companies will invest in businesses that are not listed on a stock exchange. Meanwhile, venture capital firms will invest in early-stage businesses with a lot of potential for development.

Hedge Fund

A hedge fund is another type of investment for accredited investors. Hedge funds are collective investments managed by expert money managers. These professional managers use various strategies to try to generate returns for their investors.

Some common strategies used by hedge funds include long/short equity, global Macro, and event-driven.

Real Estate Investment Trusts (REITs)

Another sort of investment open to certified investors is REITs.

REITs are companies that generate income in real estate. These properties can be office buildings, shopping malls, apartments, hotels, or warehouses. REITs typically pay out high dividends to their shareholders.

How Do I Become an Accredited Investor?

The SEC has created three steps for those who want to become accredited investors.

Step 1: Meet the Criteria

The first step in becoming an approved investor is to fulfill the requirements listed above. If you do, you can then fill out the application for accredited investors and submit it to the SEC.

Step 2: SEC Background Check

Next is to pass a background check. The SEC will conduct a background check to:

• Ensure the legitimacy of your identity
• Confirm you meet the criteria to become an accredited investor

Step 3: Receive Accreditation

After you have passed the background check, you will be issued a certificate of accreditation. This professional certification is valid for five years, so you'll have to renew it every five years.

How Do I Determine If I Am an Accredited Investor?

There is no standard method to show your accredited status. As such, companies that offer investments to legitimate investors are obligated by law to take measures to verify your eligibility.

This means that you may need to provide your credit report, financial statements, and/or show that your net worth, or joint net worth if you are married, is at least $1 million.

If you’re not sure whether you meet the qualifications to be an accredited investor, don’t worry. There are resources available to help you figure it out. For one, the SEC has published a helpful guide that covers the requirements in detail.

You can also check with your accountant or talk to financial advisors. They should be able to tell you if you meet the criteria based on your financial situation. They can also help if you need assistance with the application procedure.

Expand Your Investment Portfolio by Becoming an Accredited Investor

Now that you know how to become an accredited investor, it’s time to expand your portfolio and take advantage of the benefits that come with this status.

Remember, becoming an accredited investor opens up a world of new investment possibilities for you. It also allows you to invest in early-stage companies and get in on the ground floor of new and exciting ventures.

If you would like to become an accreted investor, contact us at UpMarket today. We will gladly help you get started with the application process so you can reap the rewards of being an accredited investor.