According to the regulations of the Securities Exchange Commission (SEC), an accredited investor is permitted to invest in certain exemptsecurities and has demonstrated adequate wealth or sophistication in the financial sense to comprehend the potential risks of these types of investments. Accredited investor status is obtainable in various ways as briefly mentioned below.
Qualifications for Accredited Status
There are multiple tests that can be applied in order to qualify as an accredited investor. However, the most common for natural persons (there are separate tests for entities) are the income and net worth tests. To be an accredited investor, regarding the income test, a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. Regarding the net worth test, Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 (excluding the value of the primary residence).
Since the original definition of accredited investor was enacted, there has been discussion regarding amendments to include certain individuals having a particular level of knowledge who can obtain accredited investor status. In particular, these individuals can include financial advisors and others demonstrating particular knowledge (verifiable by FINRA). While these changes are not yet finalized, the industry remains hopeful that they will be adopted in due time.
Exempt Securities Available to an Accredited Investor
There are particular types of investments the SEC intends to protect individuals from through the classification of accredited investor. The types of assets reserved for these sophisticated investors are as follows.
Exempt securities are often used by smaller size companies that cannot endure the cost of regulations. Exempt securities may include investments in a private/startup company. Such an investment is generally high risk and high reward. It is possible to lose your entire investment placed in a startup. This is opposed to the significantly lower risk investments offered through public companies.
Private equity, hedge funds, private real estate funds, and venture capital funds all fall into the category of exempt securities. A number of new online offerings are also coming into the marketplace.
Once you reach accredited investor status, you will have the opportunity to explore the various opportunities available. Real estate is one of these opportunities and can be very profitable. However, there are also other opportunities available in the realm of seed investing and venture capital.
