With the continued uncertainty in today’s economy, more investors are considering the opportunity of becoming an accredited investor. This select group of individuals, corporations, and retirement plans enjoy the privilege of unique investment opportunities, all of which are regulated by laws established during the Depression era.
While there is no “process” of becoming an accredited investor, there are strict requirements delineated by the U.S. Securities and Exchange Commission. They ensure that the individual has enough reserves to partake in riskier investments without creating long-term liability for the economy.
So what exactly is needed to become an accredited investor? According to the SEC, an individual must:
- Have a minimum income of $200,000 and be likely to maintain it for the next two years, or
- Be a couple with a combined annual income of $300,000 or more, and able to maintain it for the following two years, or
- Have a net worth of $1,000,000, not including their personal residence.
These requirements gauge the financial capacity needed to become an accredited investor. Since investing in private companies is a riskier strategy, the SEC aims to protect both investors and the US economy. Becoming an accredited investor is more about meeting these requirements than fulfilling any sort of “process.”
Satisfying the Income and Net Worth Requirements
The first step to becoming an accredited investor is to satisfy the income requirement as set forth by the SEC. This is actually more difficult than it may seem, as less than 3 percent of the population makes $200,000 or more from their job each year. To meet the income requirement, many individuals pursue multiple streams of income through starting a business, real estate investment, and stock market investing.
If you don’t currently qualify for the income requirements set for accredited investors, it’s important to assess your current streams of income. Strategically planning your career and tweaking current investments can put you in a position to become an accredited investor in just a few years.
Aside from income, an individual can become an accredited investor by proving a net worth of at least $1,000,000. This excludes the asset of his or her personal residence. This means that bank statements, appraisal reports, certificates of deposit, tax assessments, and other statements of securities holdings will be reviewed to determine whether the net worth requirement is met. Once these financial thresholds are met, an individual, corporation, and endowment or retirement plan may gain status as an accredited investor.
Life as an Accredited Investor
Though the requirements for achieving accredited investor status were meant to protect the public from bad deals, they also open the door to unique opportunities. Sure, they’re riskier investments, but the potential of higher rates of return at faster speeds is widely appealing.
Some of the benefits of being an accredited investor include:
- Access. With access to exclusive investment opportunities that “average” investors cannot access, you have a much higher return potential. An example is Series A Stock. Nearly everyone understands that company initial public offerings, or IPOs, often generate a lot of upside for company owners and those who have the opportunity to “get in on the ground floor.” Series A stock (pre-IPO) upside is even better than buying IPO stock the day of release since it can usually be purchased at lower cost than when it is released to the public during an IPO. Series A stock is typically ONLY available to Accredited Investors due to the risks involved.
- “Angel” investor opportunities. This allows you to invest in the earliest stages of a budding company. There are numerous Angel investor groups around the country, many of which regularly host investment forums where entrepreneurs can present their business plans to Angel investors in the hope of obtaining funding. While there is a very high level of risk investing in a startup company, the rewards can be enormous when one is successful.
- Private Placements. While nearly all investments must be registered with the Federal and State governments, there are legal exceptions for those who are sophisticated and financially sound, i.e., for Accredited Investors. These Non-Public offerings are exempted from the requirement to go through the lengthy and expensive process of registering with the Securities and Exchange Commission per Regulation D of the Securities Act of 1933. However, to qualify they must only be offered to Accredited Investors. Since Private Placements are far less expensive to create, they are used frequently for smaller, localized projects, such as real estate development, and can be very risky but provide very high return on investment should they succeed.