Requirements For An Accredited Investor

An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. Such investors are presumed to be sophisticated and to have a reduced need for the protection provided by regulatory disclosure filings. Accredited investors include high-net-worth individuals, banks, insurance companies, and certain other large institutional investors.

Individual Requirements:

A. Income-based criteria:

• Individuals: Must have had an income of at least $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expect the same for the current year.

B. Net worth criteria:

• Individuals: Must have a net worth exceeding $1 million, either individually or together with a spouse. This calculation must exclude the value of the person’s primary residence.

It’s worth mentioning that you must meet those income requirements based on the same method for all three years: single or joint. So let’s imagine a married individual made $250,000 two years ago, but his wife did not work. Last year, he made $160,000 and his wife earned $200,000 (totaling $360,000). The couple can easily demonstrate it has the capacity to earn the same amount or more this year.

The above example may make it seem like the couple met the requirements to become accredited investors. However, the pair did not calculate income using the same method for all three years. To gain accredited investor status, an individual must meet those thresholds for all three years either individually or with a spouse. The only exception applies if the individual was single and then married or vice versa during that three-year period.

Entity Requirements:

A. Assets under management:

• An entity like a bank, insurance company, registered investment company, business development company, or small business investment company, typically qualifies based on its own criteria.

B. Entities:

• An entity in which all the equity owners are accredited investors.
• Entities with total investments of $5 million or more that weren’t formed to purchase the securities in question.

C. Trusts:

• Trusts with assets exceeding $5 million, not formed only to acquire the securities offered, with a sophisticated person directing the investment.

Recent Changes & Considerations:

A. Knowledge-based criteria:

• In addition to the financial criteria, the SEC has suggested that there might be room for an individual to qualify as an accredited investor based on certain professional certifications or designations. This was aimed to recognize investors’ financial sophistication, regardless of their income or net worth.
• Hold (in good standing) a Series 7, 65, or 82 license

B. Spousal equivalent:

• The amendment by the SEC allows for cohabitants occupying a relationship generally equivalent to that of a spouse to pool their finances for the purpose of qualifying as accredited investors.

Why Become an Accredited Investor?

• Access to Private Offerings: Many private investment opportunities, like private placements or certain hedge funds, are only available to accredited investors.
• Potentially Higher Returns: These private investments sometimes offer the potential for higher returns, though they can also come with higher risks.
• Diversification: Being an accredited investor can offer opportunities to diversify a portfolio beyond typical public securities.

Always ensure to keep updated with the latest requirements and regulations. The SEC website or your local securities regulator is a good resource for the most recent criteria for becoming an accredited investor. If considering such investments, consult with a financial advisor or legal professional to understand the implications fully.