There are many benefits to becoming an accredited investor, including the ability to invest in private equity, venture capital, hedge funds, private placements, and equity crowdfunding offerings.
Unfortunately, due to the risky nature of these investments, only individuals who meet the SEC (Security and Exchange Commission) requirements are allowed to participate in these opportunities.
U.S. Securities Law limits high risk investments to individuals meeting these requirements:
“A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person OR 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.”
Below, you can see an example calculation for determining your net worth and whether or not you qualify as an accredited investor.
Basically, you need to have a $1 million net worth (excluding your house) or have had over $200k in income in the last two years and expect to have the same in the current year.
There are other requirements if you have a trust or are a corporation, partnership, or other type of organization.
How do you register as an accredited investor?
You do not officially register with the SEC to become an “accredited investor. ” Instead, when you are making an investment, the company issuing securities will give you a questionnaire that will determine whether or not you qualify as an “accredited investor.” This will likely require submission of financial statements.
According to Antone Johnson, a startup lawyer for 18+ years, the issuer of the securities bears responsibility for violation of securities law with regards to your investor status.
For example, on the equity crowdfunding platform Crowdfunder, the instructions for accredited investor verification are as follows: “If you are an Accredited Investor, simply login and click the following link. From there, check the ‘I’m an Accredited Investor’ box, which will then allow you to fill out a questionnaire to verify your accredited status on Crowdfunder.”
How many accredited investors exist?
“We estimate that at least 8.7 million U.S. households, or 7.4% of all U.S. households, qualified as accredited investors in 2010, based on the net worth standard in the definition of ‘accredited investor'” – SEC Report.
I qualify as an accredited investor, now what?
If you qualify as an accredited investor and are screened without a reasonable doubt by the party offering securities, then you can now invest. The information in this article does not constitute legal or account advice and I would highly recommend consulting a lawyer and accountant before making any investments.
What is equity crowdfunding?
Equity crowdfunding is a newer form of investing that accredited investors can take advantage of. Essentially, you can invest in companies online without having to hunt down good deals or seek out entrepreneurs. You can also invest smaller amounts among other angel investors to minimize the risk of contributing capital.
There are numerous equity crowdfunding platforms where you can find investments related to startups or real estate.
Conclusion
Let me know if you have any questions via comment below. For more information, check out this SEC Accredited Investor Bulletin.
