What is an Accredited Investor?

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An accredited investor is a term defined by the U.S. Securities and Exchange Commission (SEC) to identify individuals or entities that are financially sophisticated and have a reduced need for regulatory protections. These investors have access to private investment opportunities—such as hedge funds, venture capital, private equity, and certain real estate deals—that are not available to the general public.

To qualify as an accredited investor, an individual must meet specific financial criteria, such as a high net worth or income level, or hold certain professional certifications. The purpose of these requirements is to ensure that investors have the financial capacity and experience to handle the risks associated with private investments.

Understanding Accredited Investors

What is an accredited investor? Are they experienced investors? Investors with high net worth? Financial professionals managing people’s portfolios? There’s a lot of misunderstanding over who can be an accredited investor and what it entails. Accredited investors can be individual investors, professionals, or entities. Accredited investors have a large amount of money to invest, upward of $1 million. They can be individual investors or financial professionals; they are typically savvy investors with enough capital to invest in assets or ventures that have high capital requirements. 

Individuals, professionals, and businesses that are accredited investors also have access to unregulated investments or Reg D offerings. These aren’t regulated by the SEC and can often have higher returns. Oftentimes, they are private offerings by small, startup companies looking to raise quick capital. Accredited investors can supply capital and expect a larger return than a public offering. Accredited investors also have more opportunities to invest in hedge funds, crowdfunding, venture capital, and private equity.

Accredited investors are serious investors who have large amounts of capital to invest in a variety of opportunities. They could invest for themselves and their family, clients, or a business. Their goal is to use the capital at their disposal to continue building wealth by investing in securities that aren’t registered with the SEC.

Requirements for Accredited Investors

There are two main ways that investors can qualify as accredited investors. They can meet the income & wealth requirements or the professional criteria. 

Most individual investors will seek accreditation by meeting financial requirements. To reach accredited investor status, individuals must demonstrate their wealth through high income or total net worth. Investors must prove they make over $200,000 per year individually, or $300,000 per year as an investor. They must have received this amount of income in the prior two years and should be able to prove that they can reasonably expect to make that amount in the current year.

The other option is for investors to prove they have a net worth of $1 million or more. The investor’s primary residence cannot be counted as an asset for this purpose. Other investments, properties, funds, and bank accounts can count. Additionally, clients of a family office would also be considered accredited investors.

Financial professionals can also be considered accredited investors if they meet certain criteria. They must hold either the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82). 

General Partners, directors, and executives of a company selling securities are also considered accredited investors. 

Businesses and other entities can also be considered accredited investors, but like individual investors, they must meet certain criteria. First, businesses where all equity owners are accredited investors will immediately be considered accredited investors. Financial institutions and SEC- or state-registered investment advisors and SEC-registered broker-dealers are also accredited.

Entities that own assets over $5 million can be considered accredited investors. Also, corporations, partnerships, LLCs, employee benefit plans, and other entity organizational structures with assets exceeding $5 million could qualify.

How to Become an Accredited Investor

Becoming an accredited investor is fairly straightforward if you meet the criteria and have the financial statements to prove it. There is no official application or certificate given. Instead, investors would find an unregistered fund or other private investment. The firm will likely provide a questionnaire to determine accreditation eligibility. They might ask for W-2s, tax returns, credit reports, and other financial statements to prove eligibility. If they find that you meet the criteria, then you’ll be accepted and allowed to invest in the fund or security.

Investment Opportunities for Accredited Investors

Individuals, couples, professionals, and entities often seek accredited investor status to qualify for more investment opportunities. Here are a few types of investments typically reserved for accredited investors.

• Crowdfunding: Crowdfunding collects capital from a small group of investors to finance a business venture. This could involve buying a piece of real estate, where all investors contribute capital and receive returns when the investment period is up. It could also be used for business startups or other ventures.
• Real Estate Syndication: A group of investors may pool their capital together to purchase a large or commercial property, such as apartment buildings or retail properties, called real estate syndication. In this arrangement, the syndicators, or the General Partners, are responsible for finalizing the deal and overseeing the day-to-day responsibilities of the property. The passive investors have small ownership of the property but aren’t involved in the day-to-day.
• Convertible Investments: Convertible investments are securities that can be converted to another type of security, often to common company stock. The company may issue a security as a private offering, and then convert it to a common stock.
• REITs: Real estate investment trusts or REITs, allow investors to invest in a trust that is actively managed. The capital is then used to buy and sell a portfolio of real estate. There are some publicly traded REITs, but REITS that can produce higher returns are often reserved for accredited investors.
• Venture Capital: Venture capital is similar to a private equity investment but is specifically designed for startups and small businesses seeking rapid growth. Investors will provide capital to these companies to help them grow and expand. Once the investment horizon is up, investors will hope to receive part of the profit as their return.
• Hedge Funds: A hedge fund pools capital from a small group of investors and is managed by an active fund manager. The fund is organized as an LP, where each investor is a limited partner. The fund manager will oversee its investment, rebalancing, and performance.
• Private Equity Real Estate: In private equity real estate, capital is pooled from a group of investors and used to buy, develop, and sell properties. It can also be used to fund development projects.
• Interval Funds: Interval funds are closed-end, private funds that have high minimum investments and are generally very illiquid. However, they offer high returns compared to public funds, such as mutual funds, which is why many investors find them so attractive.
• Hard Money Loans: Hard money loans are often given to businesses. They are typically given from private lenders, instead of banks, and come with a shorter repayment period and higher interest rates. However, they allow lendees to get capital quickly and lenders can potentially generate large returns from interest.

Why Do You Have to Be Accredited to Invest in Certain Assets?

Unregistered securities aren’t monitored by the SEC and don’t have to meet the regulatory standards that public offerings do. Therefore, these assets are riskier. They can generate more substantial returns, but could also involve great loss. Investors in these assets need to have the financial security to sustain potential losses. They also need to have experience and sophistication to make informed investment decisions.

Compare Investment Opportunities for Accredited Investors

Do You Need to Be an Accredited Investor?

Qualifying as an accredited investor can open up many more investment opportunities. By being able to include unregistered securities in your portfolio, you can further diversify your holdings and have a little more control over your investments. However, the criteria to be an accredited investor are steep, and not all investors will qualify, especially beginner investors. Non-accredited investors still have a variety of options available to them. Talk to a financial advisor about investments that may suit your investment goals and financial situation.

Frequently Asked Questions 

The post What is an Accredited Investor? by Savannah Munholland appeared first on Benzinga. Visit Benzinga to get more great content like this.