What is an accredited investor?
Many firms like Colony Hills Capital have a requirement that you be an accredited investor to invest with them. But what exactly is an accredited investor?
Can you apply to become an accredited investor? And can you lose your status as an accredited investor?
We’ll explore these questions in depth in this article. This will include why this requirement exists, how to become an accredited investor, and the benefits of becoming an accredited investor.
What is an accredited investor?
For most people who want to invest, they think of things like CDs, bonds, or stocks. But there is a much wider world of investment opportunities – if you qualify.
An accredited investor is a person (or entity) who can invest in private securities that are not regulated by the Security and Exchange Commission (SEC). Being designated as an accredited investor allows you to participate in private investment opportunities, such as private placements and venture capital deals, that are typically unavailable to the general public.
Now, not just anyone can qualify as an accredited investor. There are a set of requirements that you need to meet. These requirements are broken out into a series of categories:
- Income: You need to have a current annual income of at least $200,000, or $300,000 if combined with a spouse’s income. You must have had that amount for the past two years and it needs to be sustained from year to year.
- Skills: If you work in investments professionally (as an advisor or broker-dealer for example) or hold a valid Series 7, 65, or 82 license you can qualify as an accredited investor.
- Net Worth. If you have a net worth of $1 million or more (individually or with a spouse) but this cannot include the value of a primary residence.
If you meet any one of these criteria, then you qualify. A common misconception is that there is a certification process (there is not), but skip ahead a couple of sections to learn more about how to make sure you qualify and can invest with firms that have this requirement.
Why do some firms have a requirement to be an accredited investor?
While these requirements can pose a blocker for many investment options, they are put in place by the SEC for your protection.
There are several reasons that firms will require you to be an accredited investor to invest:
- Compliance: Securities offered on the market have to meet a series of regulation requirements by the SEC. This protects investors and ensures they are presented with adequate information before investing. Some investment opportunities are exempt from these requirements, but as a result, they are only offered to accredited investors.
- Investor protection: Private investments, such as venture capital deals and private placements, often involve higher risk and lower liquidity compared to publicly traded securities. Accredited investors are presumed to have the financial resources, experience, and knowledge necessary to assess these risks and bear potential losses.
- The sophistication of investments: Many private investments are complex and may require a deeper understanding of financial markets, business operations, and industry-specific knowledge. Accredited investors, by their financial expertise or professional background, are more likely to possess the necessary skills to evaluate these investments and make informed decisions.
- Due diligence and negotiation: Accredited investors typically have more experience conducting due diligence and negotiating deal terms, which can lead to better investment decisions and outcomes. This benefits both the investors and the firms raising capital, as it fosters a more informed and efficient investment process.
These requirements are designed to ensure that accredited investors have the financial means and expertise to evaluate and assume the higher risks associated with private investments, which often lack the same level of transparency and regulatory oversight as publicly traded securities.
What you can invest in as an accredited investor
Being an accredited investor opens up a new world of opportunities to invest in. We used the term “private placement” above, but there are other types of investment options only available for accredited investors:
- Unregistered securities (also called private placements)
- Venture capital
- Private Equity
- Hedge funds
- Angel investing
- Token offerings and digital securities
- Real estate (such as a real estate syndication).
The ability to invest in a broader range of options is one of the top benefits of being an accredited investor, though there are other benefits as well.
The benefits of being an accredited investor
Investing in a wider range of opportunities is one of the top benefits of being an accredited investor, but it’s not the only benefit. Let’s explore a few more common benefits:
- Diversification: Investing in alternative assets can help accredited investors diversify their portfolios, potentially reducing overall portfolio risk and enhancing long-term returns.
- Early access to high-growth companies: Accredited investors can invest in startups and early-stage companies, providing an opportunity to participate in the growth of these businesses before they become publicly traded or widely known.
- Networking opportunities: Accredited investors often have the chance to connect with other experienced and sophisticated investors, industry professionals, and entrepreneurs, which can lead to valuable relationships and insights.
- Exclusivity: Some investment opportunities are limited to accredited investors, which can create a sense of exclusivity and access to deals that are not available to the broader market.
- Potential tax benefits: Depending on the jurisdiction and investment type, accredited investors may be eligible for tax benefits, such as deductions or credits, associated with their investments.
That’s quite the list. If you’re wondering how to become an accredited investor and reap these benefits, we have you covered in the next section.
How to become an accredited investor
There’s no strict process for an individual to become an accredited investor. There is only a set of criteria that you need to meet.
No government agency or independent body reviews an investor’s credentials, and aside from the certification allowance, no certification exam or piece of paper exists that states a person has become an accredited investor. Instead, the companies that issue unregistered securities determine a potential investor’s status by conducting diligence before the sale.
So the best way to become an accredited investor is to meet the criteria. That means either an income of at least $200,000, a net worth of $1,000,000 or more (excluding your primary residence), or knowledge/passing select exams.
To verify this with a firm, you will need to provide one or more of the following:
- Tax returns from the last two years
- W-2 forms from the last two years
- Last year’s bank statements
You can also ask for an “ accredited investor letter”, which is a 3rd party document that verifies whether or not you meet the requirements. This is not necessary (as individual firms will do their due diligence), but it can help speed things up.
What is the difference between a qualified purchaser and an accredited investor?
Similarly to being an accredited investor, being a qualified purchaser also opens many doors to less-common investment options.
So, are they the same? No. Let’s examine the differences between them.
As we covered above, becoming an accredited investor requires you to have a set income ($200,000 or more), a set net worth ($1,000,000 or more), or meet a knowledge standard. The barrier to becoming a qualified investor is much higher – you need to have an investment portfolio of over $5,000,000. For this reason, qualified purchasers are sometimes called “super accredited investors”.
Why the distinction?
The SEC finds it important to differentiate between an accredited investor vs. qualified purchaser for a couple of reasons:
- Qualified purchasers can prove a greater amount of financial security and are ultimately granted access to the most unregulated asset classes, like funds containing over 100 investors.
- Accredited investors, however, can prove that they have consistently earned a significant amount of income over multiple years and are therefore able to take part in sophisticated security structures.
Each status caters to different investment goals, so the distinction matters to the firm offering the investment and the type of investors they want to attract.
Do you qualify as an accredited investor? Here’s an opportunity to diversify your portfolio and build passive income
Real estate affords a unique opportunity for investors to diversify their portfolio and build passive income, and if you are an accredited investor then a real estate syndication may be the right choice for you.
Never invested in real estate before? We’d recommend considering it. There are numerous advantages to investing in real estate, such as:
- The ability to build passive income
- Diversification of your portfolio
- Several tax advantages
If you have the appetite for it, real estate is an excellent way to diversify your investments and build wealth over time. While there are countless ways to invest in real estate, a real estate syndication (a group of individuals who invest in a property) is an excellent option.
At Colony Hills Capital, we are experts in the acquisition, ownership, and management of properties in growing markets around the country, aiming to provide consistent and above-average passive income to our investors.
While we cannot guarantee results, we always strive to deliver consistent and above-average passive income to our investors. Past performance is no guarantee of future results.
Interested in investing? Contact us today to learn more.