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What is an Accredited Investor?

Accredited investors have many more investment options than hedge funds and startups. Read about all the detail about accredited investors and how you can become one.

last update Monday, November 28, 2022





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Accredited investors have advantages that other investors don’t possess. As a result, they can buy investment assets unavailable to the general public. And they have exclusive privileges that make them exempt from many rules and regulations set to protect other investors from specific risk factors.
However, the accredited investor title is not a creation of fund managers or financial advisors. It is an official government designation for investors who meet a demanding qualifying criterion.

What Is an Accredited Investor

An accredited investor is an individual or business entity with permission from the U.S. Securities and Exchange Commission (SEC) to trade unregistered securities without restrictions. According to the SEC definition, an accredited investor is anyone who:
  • By Income. Generated an income over $200,000 — or $300,000 as part of a couple — in each of the previous two years
  • By net worth. Maintains a net worth exceeding $1 million, with or without a spouse or spouse equivalent and minus the value of the primary residence,
  • By license.  Is a knowledgeable employee with a Series 7, 65, or 82 license1
These exceptionally high wealth and professional knowledge standards are part of the U.S. government’s effort to protect investors from the possibility of experiencing significant losses without sufficient cash reserves.

In addition, the SEC extends accredited investor status:
  • to investment broker-dealers,
  • insurance companies,
  • banks,
  • entities with all equity owners being accredited investors,
  • and trusts with total assets over $5 million1.

Why Accredited Investors Get Exclusive Exposure to Unregistered Investments?

Unregistered investments aren’t subject to the Truth in Securities Act of 1933, meaning potential investors can only expect to get basic information about these assets. This condition makes investing in unregistered investments inherently riskier. However, these assets have an unshakable position in the investment sphere because of their high return potential.
SEC made trading in unregistered investments legally possible by instituting the accredited investor exemption through Regulation D, Rule 5012. In SEC terminology, an accredited investor is a “sophisticated person,” meaning that the person or entity has the financial prowess to exist in unregistered investment environments and the ability to handle substantial losses.

What Types of Investments Are Accessible to Accredited Investors?

Many people associate accredited investors with hedge funds, but these investors have investment access to many other exotic and familiar unregistered investments, including:
  • Venture Capital
  • Alternative investments
  • Private equity funds
  • Real estate investment funds
  • Angel investments.
Accredited investor-only online crowdfunding sites like Yardstreet and EquityMultiple
Accredited investors can buy unregistered securities from these entities. Also known as private placements or Regulation D offerings, these unregistered securities come with only basic details and any additional information the issuing company is willing to share.

How to Become an Accredited Investor

You can become an accredited investor by getting screened and verified by the issuing company you plan to use for investing in private placements. Following SEC guidelines, the company (issuer) will take you through a screening process that usually starts with a questionnaire3. So, prepare to provide tax returns, a credit report verifying net worth, W-2 forms, professional certifications, financial statements, and other corroborating documents.

Can a Non-Accredited Investor Put Money in Startups?

An initial investor in a startup that reaches top-tier success can receive tremendous returns. You’ve probably heard or read about people who became wealthy by investing in a hit company early. However, the reality is most of these fortunate investors were already wealthy before the company took off — they just got wealthier.
Pre-IPO startup investments are generally not available to most investors. Although some new crowdfunding platforms like StartEngine allow almost all investors to invest in start-ups, the high risks and illiquid shares of public companies make angel investing better suited for accredited investors4.
Among the available options, accredited investors typically use venture capital (VC) firms or online marketplaces for private placement offerings. VC firms use accredited investors to provide money to a VC fund that invests in a group of startups. If you become an accredited investor who buys into a VC fund, be prepared to let your money sit for an extended time.

What Can Accredited Investor Status Mean for You?

You may already get good returns on your traditional stock and bond investments. And you may forget about investing any other way during a bull market. However, as an accredited investor, you get exposure to countless investment opportunities that can add diversification to your investment portfolio along with potentially higher returns. You can also take advantage of the expert investment strategies of hedge fund managers and alternative investment firms.

FAQs

How do you prove you are an accredited investor?

You can prove you are an accredited investor by going through a screening and verification process with your issuing company. During the verification process, you must present documents that can prove your qualifications, including tax returns, a declaration of facts from your accountant, IRS forms, credit reports, proof of ownership, or other relevant documents.

How long does it take to become an accredited investor?

Since the verifying process is the responsibility of the issuing company, there is no uniform waiting period to become an accredited investor. Every issuing company has its unique rules. But you can become an active accredited investor once you complete the firm’s verifying process.

What qualifies as an accredited investor?

According to the Security and Exchange Commission (SEC), an accredited investor has a gross income of over $200,000 in each of the past two years or $300,000 in a joint relationship. Also, an accredited investor can be a person with a $1 million net worth or a professional with Series 7, 65, or 82 licenses 1. Your net worth must exclude the value of your home.


References

1. Investor. gov  https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3 
2. Investor.gov  https://www.investor.gov/introduction-investing/investing-basics/glossary/regulation-d-offerings   
3. SEC.gov https://www.sec.gov/rules/final/2020/33-10824.pdf 
4. Forbes.com https://www.forbes.com/advisor/investing/what-is-accredited-investor/ 



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