Not everyone is an accredited investor. The Security and Exchange Commission (SEC) has specific rules for accredited investors. This article discusses the regulations involved and how to determine if you can call yourself an accredited investor.
The accredited investor designation is based on financial and professional criteria set by the SEC, allowing individuals to participate in private investment opportunities such as hedge funds, venture capital, private equity, and certain real estate offerings.
According to Regulation D of the Securities Act of 1933, an accredited investor is:
Additionally, individuals with the following licenses are considered accredited investors:
According to the SEC, the above demonstrates advanced investment acumen, qualifying the individuals as accredited investors.
The Financial Industry Regulatory Authority (FINRA) oversees the assessments of license applicants and certification exams.
The following determines whether you qualify as an accredited investor per SEC regulations.
Income Test
The SEC accepts the following as qualifying income:
The idea is that higher, ongoing income can help you deal with potential investment losses. As such, one-time earnings, such as lottery winnings or inheritances, aren’t considered qualifying income.
Net Worth Test
When calculating your net worth, you need the total value of your assets and liabilities, then subtract the latter from the former. You could qualify as an accredited investor if the total exceeds $1 million (excluding your primary residence’s value).
Examples of assets include:
Meanwhile, liabilities generally consist of:
Here are a few examples of how the income and net worth tests might work.
Assets
Total: $1,400,000
Liabilities
Total: $350,000
Net Worth: $1,400,000 – $350,000 = $1,050,000
Assets
Total: $1,300,000
Liabilities
Total: $570,000
Net Worth: $1,300,000 – $570,000 = $730,000
Assets
Total: $2,200,000
Liabilities
Total: $1,300,000
Net Worth: $2,200,000 – $1,300,000 = $900,000
At first glance, Jane and James may qualify since they have high-value assets. However, their liabilities ultimately reduce their net worth. John’s net worth exceeds $1 million, which qualifies him as an accredited investor.
Verification
It’s up to the funds, brokers, or institutions to verify you’re an accredited investor. There is no regulating body to take care of this. Some investment vehicles might have a platform where you can submit documentation to show your finances or licenses. Documentation might include:
Some investment platforms allow you to use a third-party verifier. Various accreditation services are available to help investment institutions determine whether you qualify as an accredited investor.
Generally, the verification is valid for up to a year. You should update your documents annually to maintain access to these accredited investments. As such, it’s essential to track your finances to avoid issues.
Accredited investors meet specific income, net worth, or professional criteria, which may allow them to access private investment opportunities such as hedge funds, venture capital, and real estate funds. While these investments can offer unique advantages, they also come with potential risks. It’s important to carefully evaluate opportunities, seek professional advice when needed, and continue expanding your investment knowledge to make informed decisions aligned with your financial goals.
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Examples are used for illustrative purposes only.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.