What is an Accredited Investor and What Are the Benefits of Becoming One?

September 3, 2020
  • facebook
  • linkedin
  • twitter
  • google plus

An accredited investor is an individual or a business entity who is allowed to invest in ventures that are not registered with the U.S. Securities and Exchange Commission. In a nutshell, an accredited investor is proven to have the means and abilities to invest in potentially riskier investments.

Who Can Be an Accredited Investor?

The SEC defines an individual accredited investor as one who fits one or more of the following definitions:

  • Has an income exceeding $200,000 in each of the past two years (or $300,000 combined with a spouse’s income) and is expected to earn the same this year.
  • Has a net worth beyond $1 million, whether individually or with a spouse. However, this net worth cannot include the value of a primary residence.
  • Is a “knowledgeable employee of a private fund.*
  • Financial professionals with Series 7, Series 65 and Series 82 securities licenses.*

*The last two qualifications on this list were announced as amendments by the SEC in August 2020 and will take effect later this year.

Many different business entities can also be considered accredited investors, including:

  • Banks
  • Insurance Companies
  • Investment Brokers/Dealers
  • Any Entity Where All Owners Are Accredited Investors and Assets Exceed $5 Million

Why You Need to Be an Accredited Investor

The reason you must be considered an accredited investor is because the SEC has specific rules about disclosures, frauds and the sale of securities that they register. It is known as the “truth in securities” law. If you are making investments outside of this structure, you have to display that you can essentially take care of yourself. This is what being an accredited investor means.

The SEC’s accredited investor exemption is designed “…to ensure that participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.”

Any adult who opens a brokerage account can freely buy and sell any publicly traded stock, bond, mutual fund, investment trust or REIT. If they are publicly traded, they meet SEC requirements and safeguards. That doesn’t mean they are without risk. You always have to assume some level of risk when investing in anything. You can strike it rich with any investment or lose everything, whether it meets SEC regulations or not.

Higher Risk, Bigger Rewards

Accredited investors are naturally willing and able to assume more risk in the hopes of achieving greater rewards. There is no certification that says you are an accredited investor. However, companies who are selling investments to accredited investors must verify and qualify you. You will need to be prepared to release certain financial documentation to show your net worth or prove you meet the minimum income requirements.

There are advantages to being an accredited investor. You have access to more investment deals outside of the publicly traded investments that anyone can buy into. Some of these opportunities may include real estate crowdfunding, real estate syndications, venture capital and angel investing, and hedge funds. You can invest without limits. You are taking bigger risks, but you are potentially seeing a much bigger ROI through an even more diversified portfolio if you make the right moves.

Whether you are an accredited investor or not, it’s vital to have smart investment strategies and to develop a strong investment plan. Work with your financial advisor to determine if you qualify as an accredited investor. If so, you can learn more about additional high-yield investment opportunities you might not otherwise have access to.

To get your investment plan and financial strategy working for you, contact Illumination Wealth today.