How to become an accredited investor
An accredited investor is an individual or institution that's earned special status to invest in unregulated securities.
Accredited investor requirements
According to the SEC, an accredited investor can be anyone who has:
An individual or joint net worth of more than $1 million, excluding your main residence
An individual income above $200,000 for each of the two previous years or joint income with a spouse or spousal equivalent above $300,000 — with an expectation that you'll continue earning at or above those levels
For those who don't meet the income or net worth requirements, there are still options, assuming you can prove that you:
Are employed at a fund that distributes private investments
Hold in good standing a Series 7, 65, or 82 license, which are certifications for finance professionals that require an exam to obtain
In 1982, just 1.8% of American households met these qualifications. But as of 2020, that number has ballooned to 13.85% because income minimums remain static even as definitions and exceptions have expanded. For example, licensed brokers and investment advisors joined the list in 2016, and accredited finance professionals were added as recently as 2020.
Institutions like banks, brokerage firms, insurance companies, employer-sponsored retirement plans, and even trusts round out the list of accredited investors, provided they can claim assets in excess of $5 million.
How do firms determine whether you're accredited?
In the absence of SEC regulation, the onus is on individual firms to confirm accredited investor status before giving an individual the green light to purchase securities. To prove your status, you'll likely have to fill out a questionnaire that will ask you to provide variations on the following documents:
Financial statements. These will show where your money is held and invested, how much of it is there, and how long it has been there.
Credit report. This will provide a snapshot of your net worth.
Tax forms and returns. This is to confirm your earnings, so remember that you'll need to present three years' worth of documents for either you solo or you and your spouse.
Professional credentials include any certifications or designations issued by the Financial Industry Regulatory Authority (FINRA), specifically Series 7, 65, or 82 licenses.
Once you've furnished this information and been cleared by your chosen firm, you can invest in unregistered securities that aren't available to the public.
Investment opportunities for accredited investors
Once you become accredited, it "unlocks" access to products not available to the general public, such as Pre IPO investments, hedge funds, venture capital funds, private equity funds, and angel investing. This gap in access can be explained by how the SEC views each unique product. For example, the SEC considers hedge funds a more "flexible" investment strategy than something like mutual funds because hedge funds use speculative practices like leverage and short-selling.
Since these complex products require extra research and understanding, investors must demonstrate that they comprehend the risks involved in these investments before the SEC is comfortable with them diving in.
PRE IPO CLUB offers a service to help you determine if you fall within the criteria of the SEC.
What is IPO CLUB
We are a club of Investors with a barbell strategy: very early and late-stage investments. We leverage our experience to select investments in the world’s most promising companies.
Disclaimer
Private companies carry inherent risks and may not be suitable for all investors. The information provided in this article is for informational purposes only and should not be construed as investment advice. Always conduct thorough research and seek professional financial guidance before making investment decisions.
