An “accredited investor” is a designation created in 1933, through the Securities Act of 1933, and is essentially a way to classify high income or high net worth individuals. It’s intended to indicate that an individual or organization has sufficient financial knowledge and resources to understand and assume the risks associated with investing in unregistered securities.
Accredited investors have access to more investment opportunities that can provide higher returns, and are able to diversify their investments further into alternative assets not available to the general public. However, these investments could also come with higher risk, lower liquidity, higher fees, and higher minimum investment amounts.
If that sounds great to you, then here’s everything you need to know about becoming an accredited investor. The good part is, the process itself is not that difficult, apart from just making or having a lot of money.
The three main ways to become an accredited investor
There are three main ways to become qualified as an accredited investor. If you meet any of one of these criteria, there’s no paperwork you need to fill out to apply to become accredited; you are automatically an accredited investor.
- Through level of income: Have an annual income of $200,000 or more (single) or $300,000 or more (joint) in each of the last two years, and expect to reasonably maintain that level of income.
- Through net worth: Have a net worth of over $1 million, either alone or jointly with a spouse.
- Through certain certifications: Hold a Series 7, Series 65, or Series 82 license.
Become an accredited investor through income
If you made over $200,000 per year for the past two years, and can reasonably expect to make the same amount the current year, you qualify as an accredited investor. If you have a spouse, you can also use a joint income for this calculation, but your combined incomes will need to exceed $300,000.
Become an accredited investor through net worth
If you don’t have any income, you can still qualify through net worth. If you have a net worth of at least $1 million, you qualify as an accredited investor. If you have a spouse, the qualifying amount remains the same at $1 million, but you are allowed to use your combined net worths.
How is net worth determined? Your net worth is calculated by taking all of your assets using the current market value for each item, and subtracting all liabilities. Assets include everything from your home, savings, investments, and personal property. Liabilities include all debt, including your mortgage, credit card debt, car loans, and student loans. Because the value of assets and liabilities can change frequently, net worth is only a snapshot of your financial situation at a particular point in time.
Become an accredited investor through certifications
In 2020, the SEC created a new method of becoming accredited through certain professional certifications. You can qualify to become an accredited investor if you pass the exam, and hold licenses in good standing, for either the Series 7, Series 65, or Series 82.
What can accredited investors invest in that regular investors can’t?
- Private placements: Accredited investors may be able to invest in private companies that are not publicly traded.
- Hedge funds: Accredited investors may be able to invest in hedge funds, which are pools of capital that are managed by professional money managers and are typically only available to high-net-worth individuals and institutions.
- Angel investing: Accredited investors may be able to invest in early-stage startups through angel investing, which provides capital to entrepreneurs in exchange for ownership in their companies.
- Private equity: Accredited investors may be able to invest in private equity funds, which buy and manage privately held companies.
- Private debt: Also known as alternative debt, these are investments in private companies or real estate projects in the form of debt, rather than equity.
- Venture capital: Accredited investors may be able to invest in venture capital funds, which provide capital to startups in exchange for an ownership stake in the company.
Do I have to prove that I’m an accredited investor?
You don’t necessarily have to prove that you’re an accredited investor to the IRS. However, you may have to provide documents, such as a financial statement, tax return, or credit report, to specific investment vehicles that you want to invest in. For example, if you want to invest in a startup, you may have to show them that you’re an accredited investor.
Is it worth becoming an accredited investor?
Accredited investors get access to more investment opportunities than the general public. You don’t necessarily have to invest in every one of them, but it’s still advantageous to have more options available to you. The benefit of being an accredited investor is that you can invest in unique opportunities with higher potential returns, and increase your portfolio diversification.
Fortunately, being accredited is a simple process. As long as you meet the income and/or net worth requirements, you’re automatically considered an accredited investor. There’s no reporting or application requirements from the IRS, and the only time you might need to prove your qualification is when an investment vehicle asks for it.
Retirement accounts can also benefit
Some retirement accounts (like a solo 401k or self-directed IRA) allow investments into alternative assets. Rather than investing in just traditional assets like stocks, bonds, mutual funds, and ETFs, you can invest in things like real estate, crypto, private equity, and angel investing. While anyone can invest in crypto, only accredited investors can invest in private equity or venture capital.
If you’re an accredited investor as an individual, your retirement account also becomes qualified as an accredited investor. This would allow you to invest in things like early stage startups as an angel investor, and you can do it through a tax-advantaged retirement account.