The U.S. Securities and Exchange Commission (SEC) established under Regulation D, Rule 501 which defined an accredited investor as one able to bear the risk in an economic sense connected with unregistered securities. These investors must meet accredited investor requirements for certain investment under Regulation D. Such an investor may be a person, partnership, insurance company, bank, trust, or corporation.
Generally speaking, accredited investors have the ability to access investments that are not available to other investors. These investments can include venture capital, private equity, hedge fund, and angel investments. However, after the implementation of Title III of the JOBS Act in May 2016, non-accredited investors were given the ability to make investments in the equity crowdfunding market through certain offerings. Prior to this time, however, only accredited investors could access crowdfunding investment opportunities.
Qualification for an Accredited Investor
There are two tests used by the SEC to effectively determine if an individual meets accredited investor requirements. By passing one of the two tests the individual can be considered an accredited investor.
Tests for Income
Accredited investor status requires you to have a yearly income of $200,000 or more during the past two years with an expectation of meeting the income threshold in the current year. If you are married, you may also utilize the joint income with your spouse so that your combined income only needs to exceed $300,000 in order to qualify for the status.
Test for Net Worth
Alternatively, you may meet accredited investor requirements by having a net worth exceeding $1 million, either by yourself or jointly with your spouse. You may not, however, include the value of your primary residence for the calculation of your net worth.
Becoming an Accredited Investor
The question then may be asked, “How do I become an accredited investor?” There is no formal certification involved. The only requirement is that issuers, whether an agency or individual selling securities to investors, verify the accredited investor status of those investors. This generally involves the submission of financial documents to fulfill accredited investor requirements.
If you don’t know whether you qualify for this status, you can perform a financial inventory on yourself to help you determine better if you do. For the net worth method, the starting point is to determine the value of your assets, including bank accounts, real estate other than your primary residence, brokerage accounts, certificates of deposit, annuities, and other deposit accounts.
Then you need to subtract from this amount all of your liabilities, e.g., your loans, credit card debt, lines of credit, etc.
If the result does not exceed $1 million, you may still qualify if you meet the accredited investor requirements for yearly income mentioned above. You can examine your pay stubs for the past year or review your tax returns in order to help determine whether you qualify under the income test.
