How to be an Accredited Investor and Why You Want to Be One Now
Seriously, being an accredited investor is a huge accomplishment. Not just that you may have $1,000,000 in net worth, but the hard work it possibly took to get to become an accredited investor is commendable.
As I was learning how to invest in real estate, I heard the term accredited investor and had no clue what that was nor what it meant to be one. So, that got me to look further into what it was and the benefits.
The accredited investor definition is super simple. Someone who is a High Net Worth Individual (HNWI) who can invest in unregulated securities and investment opportunities.
What that means is that you have a lot of money and the governement is not going to stop you from investing your money in investments that it (the goverement) cannot or will not regulate.
Basically, you are free to do whatever you want with your money!
Who can be an accredited investor?
Accredited investors deal with securities that may not be registered with financial authorities. They could be a person or business entity. As we’ll discuss, there are multiple requirements that they are required to meet.
For example, there are guidelines around income, asset size, net worth, professional experience, or government status that they will need to meet before they can be given privileged access.
Accredited Investor Definition
An accredited investor is a person with an annual income of $200,000 or a net worth of $1,000,000. Banks, insurance companies, trusts, and High Net Worth Individuals (HNWI) all fall into the category of an accredited investor. The term “accredited investor” is also used by the Securities and Exchange Commission (SEC) and is used to classify a person or entity.
This allows the SEC to describe an investor who has the ability to invest in opportunities that the average investor would not have access to. They will usually have a reduced need for the protection provided by regulatory disclosure filings.
The reasons why you want to be an accredited investor are:
- You are a high net worth investor
- $200,000 annual income
- $1,000,000 net worth
- Access to more lucrative (and risky) investments
- Less regulation from the government on what you can invest in
- Did I say that you have either $200,000 annual income or $1,000,000 net worth?! 🙂
But above all, as an investor, you get to invest in investments like multi-family syndication's, Acre Trader, unregulated securities, and loads of other types of investments that are not regulated by the government.
Obviously, the catch is that you have a greater risk and can lose your money. So invest wisely.
The Benefits of Being an Accredited Investor
As we’ve seen, accredited investors play a vital role in the market, and there are multiple reasons why someone might want to consider becoming an accredited investor.
The government regulates certain investments only allowing accredited investors
There are investments that only accredited investors can invest in because of the risk that the investment has.
Most investments are regulated by the government so they keep control over how people invest their money.
This is not so with other investments that require the investor to be an accredited investor. These investments are not regulated (controlled) by the government so they instead regulate WHO can invest in them.
Because of the regulation of the “WHO” is going to be investing in them, the government developed the class of investor as the Accredited Investor.
Accredited investors gain the ability to invest in unregulated securities.
These unregulated securities include areas such as private placements, venture capital, private equity, equity crowd-funding, and hedge funds.
With this wider range of investment options, they are able to get to the more lucrative opportunities without as much competition.
These opportunities exist outside of public markets, usually as private placements, and offer higher yields.
In addition, thanks to platforms like Acre Trader, it will be easier than ever for these investors to gain access to these opportunities.
Accredited investors have the chance to invest in businesses.
Accredited investors can support, work with, and grow the businesses that they care about. There are platforms available to connect with start-ups at all stages of development. A
ccredited investors also have the ability to involve themselves in a start-up before the company goes live.
This will allow them to give their perspective on the business before other members of the public, helping guide the business in the right direction.
Being able to get access to these investments often comes with a higher level of risk, which we’ll discuss later. However, it will also allow you to get started with a company early in the process.
If you are able to choose the right business, you will be able to experience huge growth. This can lead to a huge reward for your efforts.
The key is being able to spot these organizations, though this should be easier if you get the right kind of training to tell you what you should be looking for.
Accredited investors can develop more diversified portfolios.
Public markets with rising interest rates may offer only limited diversification options for your portfolio.
Investment assets that are unrelated to the public market will help reduce any volatility or market risks.
In some cases, non-accredited investors won’t be able to access these assets.
Because of this privileged access, an accredited investor will be able to better protect their portfolio, lowering the amount of money they can lose in a market downturn.
What Are Accredited Investors and What Qualifies You As One?
Banks, insurance companies, trusts, and High Net Worth Individuals (HNWI) all fall into the category of an accredited investor. There are two main qualifications that an accredited investor will need to satisfy.
First, they will need to have a high net worth. This doesn’t take into account the value of a private residence. In addition, they will need to have a high yearly income.
- The annual income required is $200,000 for at least two years with reasonable certainty that this figure can be maintained. Alternatively, a joint income of $300,000 for a household is accepted.
- The net worth threshold is set at $1,000,000 (excluding private residence).
If you are an accredited investor you potentially get access to the opportunities that everyone else are not able to invest their money in.
What Is a Qualified vs. Accredited Investor?
A qualified investor is essentially the same as an accredited investor, but the difference comes with the titles of qualified client and qualified purchaser that have a mildly contrasting set of rules.
Like the accredited investor, it generally comes down to income and capital. Any of these three groups may invest in a hedge fund, but there are a few noticeable differences.
You are considered a qualified client if you have at least $750,000 in assets under management or have an individual (or combined spousal) net worth of $1,500,000.
A hedge fund manager is much more likely solicit to a qualified client rather than an accredited investor.
This is because a hedge fund manager may only charge their performance fee (often around 20%) to qualified clients, but an accredited investor may only be charged a greatly reduced management fee (2%).
The specifications that make someone a qualified purchaser (or super-credited investor) have only got to be hit once:
- either an individual who owns $5,000,000 or more in investments (including those held with a spouse)
- a family-owned business that owns $5,000,000 or more in investments
- or a business that has $25,000,000 or more in investments
You may also be titled a qualified purchaser if you have a trust sponsored by other qualified purchasers.
How Do You Become an Accredited Investor?
A common misconception is that a process is needed to become an accredited investor.
Instead, the company that an accredited investor may invest in is to check to see if the person investing is actually an accredited investor before any sale is commenced.
A personal balance sheet should be created, subtracting the total number of liabilities against the total assets.
No formal agency or institution confirms the accreditation of an investor, and no certification is issued.
But since 2013, the SEC has required that anyone selling to accredited investors must take a variety of steps to verify this status.
If the individual believes they qualify, they can visit a fund and ask for the information about potential investments. Then, the issuer of securities will give a questionnaire to determine whether a person qualifies as an “accredited investor.”
This method will also likely require the attachment of information of accounts or financial statements in order to verify the ownership of their assets listed on a personal balance sheet. Companies will likely evaluate a credit report in order to assess any debts held.
Anyone who bases their qualifications on annual income will likely need to submit tax returns and other documents that indicate income or wages.
Letters from reviews by CPAs, tax attorneys, investment brokers, or advisers may also be considered.
How Do You Prove That You Are an Accredited Investor?
If you want to become an accredited investor, there are a few steps that you will need to go through.
As we mentioned, this can often involve taking high risks to gain large rewards.
For this reason, regulators want to make sure that the accredited investor has the ability to absorb any losses that they might encounter.
As an individual, there are three ways to prove you are an accredited investor.
Third-party Verification Method for Accredited Investors
There are many third party verification methods. Written confirmation can be used when obtained from a variety of external sources such as
- a registered broker-dealer
- an investment adviser registered with the SEC
- a licensed attorney who is in good standing under the laws of the jurisdictions in which they are admitted to practice law
- or a certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office
The written confirmation must certify that reasonable steps were taken to prove that you are an accredited investor within the prior three months.
Income Verification Method
This is a more direct and simplistic option. To do this, you will need to provide official records that show your income.
This can often be provided by the government, taking the form of pay stubs or tax filings. Alternatively, your accountant or employer may confirm your annual income.
You will also need to provide an affirmative statement that your expected income in the current year meets the minimum income level.
Net Worth Verification
You can disclose your assets and liabilities so that net worth may be calculated. This will often require you to provide a range of documents.
This can include things like a credit report, evidence of assets, and disclosure of liabilities.
By doing this, it will be easier for your net worth to be calculated to determine whether or not you meet the minimum requirements to become an accredited investor.
Purposes of an Accredited Investor
There are a few reasons why accredited investors play an important role in the markets. First, they are able to seek out private investment opportunities.
These can often be companies that haven’t yet been developed beyond an interesting idea. As mentioned earlier, this can represent a significant risk.
However, if the accredited investor can see the future growth opportunities of the company, they will be able to dedicate time and resources to help people explore the idea.
By doing this, they will be able to help business ventures grow and flourish.
When this process works, the investor can start to make a lot of money. They will also be able to help the business community, bringing more ideas to the market.
Becoming an accredited investor can open you up to a wider array of markets, make it easier to invest in business opportunities, and let you build a more diversified portfolio.
However, it might also come with a more significant amount of risk that you will need to learn how to manage.
We also looked at the qualification process to see whether you will be able to meet the requirements to become an accredited investor.
So, now you will be able to make an informed decision about whether or not this opportunity is right for you.
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