Does the term “accredited investor” ring any bells? Maybe you think you know what an accredited investor does, or maybe you’re just fuzzy on a few of the details. You could also be wondering if it’s worth the effort to get accredited and what the real benefits are.
At VentureSouth, our angel investment group members are required to be accredited investors. Accredited investors get exclusive access to unregistered investment opportunities and private stock offerings, that could, if things go well, have a chance to earn higher returns than the stock market average. Admittedly, they do have to dodge liquidity risks, a lack of regulatory disclosures, the occasional bad actor and the frequent bad idea, but these are issues that can be navigated with strategy and experience.
Interested in taking the plunge and diversifying your investment portfolio? Our “Investing 101” guide will help explain how to become an accredited investor – including the net worth and income qualifications, the rules governing who can and cannot be an accredited investor, and some simple ways you can determine if you meet the current criteria for accreditation.
How to Qualify
Accredited investors are considered “financially sophisticated,” possessing the kind of mind and judgement necessary to identify promising investment opportunities. However, this level of trust comes with a certain level of responsibility. As an accredited investor, you would be required to self-certify your status, or in some cases be verified by a third-party firm that can look at tax returns, proof of salary, and other forms to confirm your financial standing.
Here are some more specific (slightly simplified) qualifications set by the Securities and Exchange Commission (SEC) for how to become an accredited investor:
- Net Worth: The SEC requires a net worth of $1 million, excluding primary residence. Remember that net worth can be calculated by subtracting your liabilities (e.g.. debt) from your assets (e.g., cash, investments, real estate, and other valuable possessions), or:
- Individual Income: This must exceed $200,000 over the past two years, or:
- Joint Income: This must exceed $300,000 over the past two years.
There are also professional qualifications for becoming an accredited investor. In order to prove your financial expertise, the SEC states that you can hold one of the following licenses: Series 7 (General Securities Representative), Series 65 (Investment Advisor Representative), or Series 82 (Private Securities Offering Representative).
Finally, you can be considered accredited investor material if you are a knowledgeable employee of a private fund. Knowledgeable employees include executive officers, directors, trustees, general partners, advisory board members, and private fund employees who have participated in investment activities for at least a full year. You are also considered “accredited” if you are investing in your own company.
Understanding the Rules
Why do the qualifications we’ve listed above exist? Nearly a century ago, the Securities Act of 1933 was enacted to regulate offers and sales of securities, protecting investors and encouraging business growth at the same time. With the new law came Regulation D, a provision that helped set the standard for the knowledge and financial merits of accredited investors. In fact, this is when the concept of accredited investors was born.
Even now the rules continue to evolve. For instance, the Dodd-Frank Act, passed in 2010, ensured that the value of one’s primary residence can no longer be used to calculate net worth.
Simply put, the rules are designed to protect investors who have limited financial knowledge or investment experience and may bite off more than they can chew. As a result, individuals with sufficient wealth and a better grasp on the volatile world of investment strategy are favored.
Let’s break it down a little further:
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- Investor Protection: When we mentioned investors who may bite off more than they can chew, we are talking about how significant the financial consequences can be when a high-risk investment doesn’t work out. Investors in poor financial standing often can’t withstand a serious loss, and the current rules and qualifications guard against this.
- Sophistication Standard: When it comes to making wise financial choices, accredited investors can’t just talk the talk. They have to walk the walk, too, and net worth thresholds seek to demonstrate their ability to use good judgement.
- Access to Private Markets: If everyone could be an accredited investor, private placements and early-stage companies wouldn’t pose such exclusive opportunities. The SEC’s rules limit who can participate in an effort to make successful investment partnerships more likely.
Opportunities for Accredited Investors
With a solid grasp of accredited investor qualifications, you’re well on your way to knowing where you stand. Once you’ve assessed your net worth and obtained the right license, you can also explore existing opportunities for accredited investors, including venture capital investments (investments in early-stage companies with high-growth potential in exchange for equity in the company) and angel investments (investments in a business or businesses, including startups, usually in exchange for convertible debt or ownership equity). In other words, you could play a pivotal role in the early success of a variety of small businesses and entrepreneurial dreams.
Additionally, we want to share some tips for evaluating your status as a potential accredited investor:
- Review SEC Guidelines: Begin with the details (and linked resources) we’ve provided above. Calculate your net worth, think about your current employment situation and projected future earnings, and review your individual or joint tax returns to confirm your true income.
- Consult a Financial Advisor: A professional can help you accurately assess your financial situation and determine if you meet the requirements to be an accredited investor.
- Provide Documentation When Necessary: Be prepared to show bank statements, W-2’s, brokerage accounts, your credit report, and other supporting documents to verify your eligibility for investment.
More Investing 101: Joining an Angel Investment Group
If you’re an aspiring investor, membership with VentureSouth may be on your radar. With over 500 accredited investor members, our angel investment group has a rich variety of founders and business leaders who are experts in their areas of business, whether that’s biotech, software, or something else entirely. Thanks to this diverse network and our commitment to identifying only the most promising opportunities for accredited investors, we’re able to help startups and unique business ideas flourish.
We’re open to both experienced investors and investors who are just getting started, but you must be an accredited investor to join. You can submit a membership application here, or learn more about what it means to fly with VentureSouth.