Accredited Investor Defined: Understand the Requirements

By Peter A. Elwell, CFA | June 5, 2023

Accredited Investor

Some investment opportunities can be heavily regulated to protect investors and the issuers of securities. The U.S. Securities and Exchange Commission (SEC) doesn’t allow all investors to make every investment. Certain investments are restricted only to accredited investors, which are people or entities who meet a list of strict qualifications.

The category of accredited investor is intended to ensure that investors in complex financial products are financially and professionally equipped to protect themselves and make sound investment decisions. Understanding how to become an accredited investor can help you determine whether you qualify.

What Is an Accredited Investor?

The definition of an accredited investor is a legal entity or an individual that is legally allowed to invest in investments that are not registered with the SEC. The SEC accredited investor definition lies in Rule 501 of Regulation D of the Securities Act of 1933. To qualify as an accredited investor, individuals must meet specific financial and/or professional criteria, while entities such as corporations or financial institutions must satisfy particular requirements, such as a certain number of assets and investments or be an entity where all owners are SEC-accredited investors.

Offerings registered with the SEC must publicly disclose information to investors and meet specific requirements from the SEC for safeguarding investments. These investment opportunities include publicly traded bonds, stocks, mutual funds, and publicly traded real estate investment trusts (REITs). However, accredited investors must have the financial knowledge and experience to invest in offerings that don’t provide these protections.

The category of accredited investors restricts which people and entities can participate in certain investments. The requirements for qualifying as an accredited investor are in place to ensure these investors have the wherewithal to manage their finances and protect themselves from loss. The term accredited investor is also used to describe investors who have the financial ability to absorb losses.

Requirements for Accredited Investors

The SEC’s requirements for accredited investors are different for individual and institutional investors. Investors who meet these qualifications are typically considered sophisticated, meaning they have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

Although the SEC has created guidelines for who qualifies as an accredited investor, those who want to take advantage of those investment opportunities don’t have to obtain an official certification. Instead, the companies selling unregistered securities must verify a potential investor’s qualifications against the requirements provided by the SEC to ensure they are only selling their offerings to accredited investors. An individual investor meets the primary requirements to qualify as an accredited investor if they have at least one of the following qualifications:

  • Yearly income: An accredited investor must have an annual individual income in excess of $200,000 or a joint income of $300,000 for the two previous years. The investor must reasonably expect to maintain the same income level in the current year.
  • Net worth: A person may also qualify as an accredited investor if they have an individual net worth of over $1 million, or a joint net worth with their spouse of the same amount. Their net worth cannot include the value of their primary residence.
  • Investment professional: Individuals who are investment professionals holding in good standing one or more professional certifications from educational institutions the SEC has selected.
  • Professional criteria: Someone can also be an accredited investor if they are a director, executive officer, knowledgeable employee, or general partner of the issuer of the securities being offered.

How to Become and Accredited Investor?

If an individual wants to become an accredited investor, they must meet the experience and competencies above and provide further details about their income, assets, and liabilities. Investors have the responsibility to represent themselves truthfully by providing information such as W-2 forms, tax returns, proof of salary, and letters verified by accountants, tax attorneys, or investment advisors.

Rule 501 additionally provides requirements for companies, organizations, trusts, and other entities to qualify as accredited investors. An entity can qualify as an accredited investor when it meets one of the following criteria:

  • Total assets: The organization or private business qualifies as an accredited investor when it has more than $5 million in assets. The organization cannot qualify if it was formed for the express purpose of acquiring the securities.
  • Total investments: An entity may qualify as an accredited investor if it has investments exceeding $5 million, was not formed to acquire securities, and meets none of the other requirements for entities.
  • Owners who are accredited investors: If all of the entity’s owners are accredited investors, the entity can function as an accredited investor.

The full list of criteria also includes specific company types regardless of total assets or investments, including:

  • Banks
  • Insurance companies
  • Investment companies
  • Certain employee benefit plans
  • Business development companies

The accredited investor definition ensures investors have the finances and experience to reasonably protect themselves from loss.

Purpose of Accredited Investor Requirements

The accredited investor definition ensures investors have the finances and experience to reasonably protect themselves from loss. Registration of securities with the SEC involves a company disclosing information about the security it’s offering, its financial statements, management information, and more. However, these requirements can sometimes become a financial burden for some companies. Therefore, the SEC provides several exemptions to allow companies the opportunity to sell unregistered securities.

The common exemptions from registration requirements include:

  • Small offerings: Companies can sell up to $5 million in securities during a 12-month period. 
  • Private offerings: Companies can sell securities to up to 35 non-accredited investors and unlimited accredited investors. However, they must also file Form D within 15 days of the first sale.
  • Intrastate offerings: Companies can sell securities exclusively within one state without federal registration. They must be incorporated in the state and may still need to meet state requirements.
  • Crowdfunding: Companies can sell securities to non-accredited investors using crowdfunding platforms under the JOBS Act. Though they don’t need to register, companies still must meet disclosure requirements, and the amount they can raise is limited.
  • Employee benefit funds: Companies can sell a limited amount of securities if they are part of an employee benefit plan or related to an acquisition or merger.
  • Government securities: State, federal, and municipal governments can sell securities without registration.

The accredited investor category safeguards investors. Regulators want to promote safe and informed investment in ventures with varying levels of risk. However, they also want to protect less experienced investors who don’t have the knowledge to understand an investment’s risks or the cushion to absorb losses. Investors who meet these qualifications have less protection from the SEC against the risks of investing and can evaluate investments on their own. 

Despite the reduced protection from the SEC, accredited investors still benefit from several protections in the industry. Financial Industry Regulatory Authority (FINRA) regulations do not exempt registered financial professionals from suitability requirements, investment misrepresentation, and fraud. Investment advisors must always perform their fiduciary duties toward their clients. 

Example of an Accredited Investor

An example clarifies how people qualify to become accredited investors. 

Suppose an individual had a joint annual income with their spouse of $250,000. The person has assets including a primary residence worth $1.5 million with $900,000 remaining on their mortgage. The person also owns a car worth $150,000, with an outstanding loan of $70,000. In addition, they have a savings account with $450,000 and an IRA worth $500,000.

Because the individual didn’t meet the $300,000 annual joint income threshold, they do not qualify as an accredited investor based on annual income. However, they do qualify based on their net worth because it exceeds $1 million.

To calculate net worth, subtract liabilities from assets. First, calculate this person’s assets — except the primary residence — by adding $150,000 + $450,000 + $500,000 for a total of $1.1 million. From that total, subtract their liabilities — not including their mortgage — which is the car loan worth $70,000. Their total net worth is $1,030,000. Because the person’s net worth is over $1 million, they are an accredited investor as defined by Regulation D.

What are the Benefits of Being an Accredited Investor?

Only accredited investors can invest in specific real estate offerings and unregistered securities, which non-accredited investors cannot access. Private equity funds, hedge funds, venture capital firms and others are among the investment vehicles that sell to accredited investors.

Some of the offerings accredited investors can invest in include:

  • Hedge funds
  • Venture capital
  • Private placements
  • Private equity funds
  • Shares in private REITs
  • Specialty investment funds

Why Do You Need to Be Accredited to Invest in Complex Financial Products?

Limiting the sales of complex financial products to only accredited investors is a way that the SEC continues to protect investors from fraudulent or overly risky investment funds and is also a way of protecting investors from themselves. As sure as an investment may seem and as great as a track record a company may have, all investments have risk. With accredited investor requirements, investors are prevented from investing beyond their means. If a poor investment decision is made, theoretically an accredited investor has greater financial means to absorb the losses.

Furthermore, unregistered private securities may have liquidity restrictions; such securities may not be able to be sold for a period of time. Accredited investors have more financial protection than general investors and can afford to have a portion of their assets locked in an illiquid investment.

Investors must represent their finances truthfully to issuers of securities. If an investor says they are an accredited investor when they aren’t, the financial company can refuse to sell securities to them.

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Ready to Start Investing? Find Opportunities With 1031 Crowdfunding

Understanding what qualifies an investor as accredited is critical for determining what types of securities you can invest in. The SEC’s accreditation requirements are in place to protect investors from themselves and allow younger and less established companies to access the capital markets. The requirements also promote innovation and progress through additional investment. Despite being accredited, all investors still need to perform their due diligence during the process of investing.

1031 Crowdfunding is a leading real estate investment platform for alternative investment vehicles primarily available to accredited investors. Accredited investors can access our selection of vetted investment opportunities. Our platform provides the data investors need to perform their due diligence about investments. With over $1.1 billion in securities sold, the management team at 1031 Crowdfunding has experience with a wide range of investment structures. To access our complete offerings, register for an investor account.

 

1031 Crowdfunding LLC does not offer securities under the JOBS Act or Regulation CF. This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.

 

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