You’ve heard the term “accredited investor” before, but what does it actually mean? In short, an accredited investor is an individual or entity that meets certain criteria set forth by the U.S. Securities and Exchange Commission (SEC), and by meeting these criteria is alloweed invest in certain types of private securities. These criteria are designed to ensure that only investors who can bear the risk of losses associated with investing in securities are able to do so.
So, what exactly are these criteria? Let’s take a closer look.
Accredited Investor Criteria
The first criterion is fairly straightforward: an accredited investor must have an individual income of at least $200,000 per year (or $300,000 per year if filing jointly with a spouse) in each of the past two years with the expectation of earning the same or more in the current year.
The second criterion is a bit more complex: an accredited investor must have a net worth of at least $1 million, excluding the value of their primary residence, either individually or jointly with a spouse.
Keep in mind this is an either/or scenario. You don’t need to meet both the income and net worth thresholds, just one or the other.
You can also meet the accredited qualification by obtaining specific industry knowledge (demonstrated by having a Series 7, 65, or 82 securities license), being a director of officer of the company offering the securities, or being a “knowledgeable employee” of an entity offering a private fund. Any “family client” of a “family office” that qualifies as an accredited investor also meets the accredited investor qualification.
As you can imagine, meeting one of the first two criteria is hands down the most common way of meeting the accredited investor status.
What are the benefits of being an accredited investor?
There are a few key benefits of being an accredited investor. First and foremost, you’re able to invest in certain types of private securities that are not registered with the SEC. This includes things like hedge funds, venture capital funds, and private equity funds.
Additionally, accredited investors often have access to exclusive investment opportunities that are not available to the general public. For example, you may be able to participate in initial public offerings (IPOs) for new companies or invest in real estate deals that are not listed on the open market.
What are the risks of being an accredited investor?
Of course, there are also some risks associated with being an accredited investor. One of the biggest risks is that you may be investing in products that are not regulated by the SEC. This means that there is less protection for you if something goes wrong with the investment.
Additionally, investments that are only available to accredited investors tend to be much riskier than those that are available to everyone. This is because they’re often new companies or untested investment products. So while you may have the opportunity to make a lot of money if the investment pays off, you could also lose everything if it doesn’t.
So there you have it—a quick overview of what it means to be an accredited investor. Keep in mind that these criteria are subject to change from time to time, so it’s always a good idea to check with the SEC to make sure you’re up to date on the latest requirements. But as long as you meet these criteria, you’re able to participate in exclusive investment opportunities that are not available to the general public.