Have you seen the term “accredited investor” but weren’t sure what it meant? Or maybe you have a rough idea, but you’re not sure about the specific requirements? Either way, you’re in the right place, as this article will run down everything you need to know about accredited investor requirements.
So, keep reading for an overview of what it means to be an accredited investor, including accredited investor requirements as well as investment opportunities for traders and institutions with this special status.
Accredited Investor Overview
According to the U.S. Securities and Exchange Commission (aka “the SEC”), an accredited investor is a person or entity who qualifies based on certain “wealth and income thresholds, as well as other measures of financial sophistication.”
In other words, accredited investors must have a certain degree of wealth. When these are individuals, the term “high-net-worth individual” (HNWI) is sometimes used.
Early-stage companies seeking to raise capital typically can only receive investment from accredited investors. In this way, accredited investors have the privilege of trading securities that may be unregistered with financial authorities or otherwise not publicly traded.
Now, let’s take a look at what exactly it takes to qualify as an accredited investor.
Accredited Investor Requirements
High-net-worth individuals and entities can both qualify as accredited investors. Here are the unique accredited investor requirements for each category.
There are financial and professional criteria for individuals to become accredited investors.
- A net worth over $1 million, excluding primary residence (either individually or combined with a spouse/partner);
- Or, income over $200,000 (individually) or $300,000 (combined with spouse/partner) in each of the prior two years, with a reasonable expectation for the same for the current year.
- Investment professionals in good standing with a general securities license (Series 7), investment advisor license (Series 65), or private securities offering license (Series 82);
- Directors, executive officers, or general partners (GPs) of the company selling the securities (or of a GP of said company);
- Any “family client” of a “family office” that qualifies as an accredited investor;
- For investments in a private fund, “knowledgeable employees” of the fund.
The accredited investor requirements for entities are different from those for individuals. They are also much more varied, with five different categories.
- Entities owning investments in excess of $5 million.
- The following entities with assets in excess of $5 million: corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family office” and any “family client” of that office.
- SEC- or state-registered or exempt reporting investment advisers and SEC-registered broker-dealers.
- Banks, savings and loan associations, insurance companies, registered investment companies, business development companies, and small business and rural business investment companies.
Owners as accredited
- These are entities where every equity owner is an accredited investor.
It’s important to note that organizations cannot be created solely for the purpose of purchasing specific securities. In other words, you can’t create a fund with the intent to invest in one specific company seeking funds from accredited investors.
2020 SEC Update to Accredited Investor Definition
Not too long ago the SEC altered the language used for the accredited investor requirements.
Of note, the amendments now allow for knowledge and expertise to contribute to what defines an accredited investor. Here is the exact language from the SEC press release at the time: “defined measures of professional knowledge, experience, or certifications.”
For example, a retired financial adviser or economics professor who may not meet the income or net worth requirements, but possesses significant financial knowledge, may now qualify as an accredited investor.
Why are there accredited investor requirements?
You may be wondering, “why do these accredited investor requirements exist?” It’s a good question, and not a simple one to answer.
There are two sides to any investment, the investor and the recipient of the capital. Accredited investor requirements aim to help protect both sides.
For example, early-stage companies may offer investors explosive growth if they succeed, but they also tend to have a much higher risk of failure than late-stage and/or publicly traded companies. So, limiting investment opportunities to HNWI’s and entities helps prevent less knowledgable and/or less wealthy individuals from losing their life’s savings to a risky investment in an early-stage company.
How do you become an accredited investor?
If you think you meet any of the requirements (as listed above), then you can approach the issuer of the unregistered securities. Said issuer may require a questionnaire to help determine eligibility. The process may also require various forms, including account information, financial statements, tax returns, and more.
Besides this, certain individuals (e.g. investment advisers) with special licenses (Series 7, 62, or 65) can act as accredited investors.
There are other, less common cases as well, such as when someone holds a trust in their management that has more than $5 million of assets under control.
Investment opportunities for accredited investors
While investment opportunities for accredited investors may often be risky due to their very nature as unregistered securities of early-stage companies, there are many other possibilities out there as well.
Should you want to take advantage of the privilege of accredited investor status, here are a few investment opportunities you might consider.
Like the name suggests, FarmTogether offers accredited investors the opportunity to invest in farmland real estate. This provides easy diversification to any portfolio, especially through the Sustainable Farmland Fund, which is itself diversified across many properties. This fund requires a minimum investment of $100k, which is fairly substantial, but not necessarily for many accredited investors.
All in all, FarmTogether is worth consideration as it offers multiple ways to invest, capital appreciation, routine dividends, and non-market-correlated returns.
First National Realty Partners
First National Realty Partners offers accredited investors the ability to invest in institutional-quality offerings. FNRP mainly focuses on retail spaces with national brands anchoring them, such as Dollar Tree, Walmart, or Aldi (among others).
FNRP has a $50,000 minimum per deal, and since 2015 it has provided investors an average return of 12-18%.
Accredited investors appreciate EquityMultiple for its array of offerings, including preferred equity deals, senior debt deals, and more. And though they may be high-net-worth individuals, accredited investors may also appreciate the ability to start investing with just $5,000, as well as the ability to put all their eggs in one basket or spread them around.
Yieldstreet is another crowdfunding investment platform. Unlike many of the others mentioned here, however, Yieldstreet offers much more than just real estate investment. With a minimum of $10,000, accredited investors can invest in a wide variety of investment categories, including art, marine, litigation, real estate, and much more.
Since some of the assets funded by Yieldstreet investors are things like art, wine, and other collectibles, they may have more volatility and risk than other, more necessary alternative investments, such as residential real estate.
Last but not least, CrowdStreet provides accredited investors with various real estate projects that they can invest in. In addition to private equity investments, there are single-asset projects as well as funds. One of the fastest-growing crowdfunding platforms, Crowdstreet has a sleek interface and offers great educational resources.
Accredited investors may appreciate Crowdstreet’s relatively low account minimum of $25,000. CrowdStreet thoroughly vets its projects, but it’s always a good idea to do your own due diligence (which is especially the case with higher-risk opportunities available only to accredited investors).
Accredited investors tend to be high-net-worth individuals or financial entities with significant assets. If they meet the accredited investor requirements, these individuals or entities have the privilege of trading unregistered securities, which is often the case with early-stage companies seeking to raise capital.
These investment opportunities can provide explosive gains if the company succeeds; on the flip side, they also tend to be riskier investments with a higher degree of failure than publicly-traded, late-stage companies.
Investors and entities who qualify for accredited investor status may want to consider taking advantage of it, and there are some great ways to do so (as outlined above).