If you have ever considered making investments outside of public markets (like stocks and bonds) in alternative investments (like private equity, real estate, startups), you may have been asked if you are an “accredited investor.”
So what is an accredited investor and why does it matter?
The short answer is that an accredited investor is someone who the federal government deems capable of taking on the risks associated with private investments. Therefore, companies and institutions raising capital outside the public markets focus on accredited investors.
While issuers of publicly traded stocks and bonds are subject to strict regulations requiring detailed reporting and disclosures, private issuers typically seek exemption from those expensive reporting requirements. One of the ways they can be exempt from the disclosure requirements is by selling only to accredited investors.
How do I know if I’m an accredited investor?
The Securities and Exchange Commission is responsible for setting the accredited investor definition, which we’ve outlined below. If you are interested in how these qualifications came to be and how they have evolved over time, check back soon for a background section at the end of this post.
An (indivdual) accredited investor is:
- Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000 (excluding the equity in the person’s primary residence).
- Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
- Any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status. The initial qualifying credentials are for a natural person who holds, in good standing, the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), or the Investment Adviser Representative license (Series 65).
In most cases, if you meet the criteria listed above, you can usually self-attest as to your accreditation when completing an investment. However, if you are participating in an equity crowdfunding campaign in which the offering relied on “general solicitation” (meaning it was advertised to the public), you will be required to document and verify your accreditation status.
In addition to the qualifications listed above, other “institutional” investors can be accredited – entities like broker dealers, investment companies, RBICs, pension plans, trusts with over $5M in assets, family offices, etc. Also, you are considered accredited for your own business if you are the owner/operator, or if you if you are the General Partner or a “knowledgeable employee” of your own investment fund.
One last note. Even if you are accredited, please remember that investing in alternative assets like startups is highly risky, and you should never invest money that you can’t afford to lose. While the expected returns of a diversified, well-vetted basket of early-stage investments are quite attractive, the odds of generating a positive return on any individual investment are less than 50%.
