An accredited investor may be an individual or a business entity allowed to carry out transactions with unregistered securities – meaning those not registered with financial regulatory bodies. This privilege is provided to these individuals or entities upon fulfilling certain criteria such as those involving income, net worth, asset size, professional experience, etc. How to become an accredited investor is the question at hand.
Examples of accredited investors include high net worth individuals, trusts, insurance companies, brokers, or banks.
The Meaning of “Accredited Investor”
The term “accredited investor” implies an individual or entity that is given special privilege or sanction from meeting certain required standards. Accredited investors have the legal right to purchase securities such as stocks or bonds that are not registered with the U.S. Securities and Exchange Commission (SEC).
Requirements for Achieving Accredited Investor Status
Accredited investors may encounter different regulations in different jurisdictions. Local financial regulatory bodies or another authority determine the rules. Accredited investor criteria are defined by the SEC in Rule 501 of Regulation D.
Net Worth Greater Than $1 million
If an individual’s net worth (either individually or with a spouse) is greater than $1 million, he or she may be designated as an accredited investor. The value of a primary residence may not be counted toward the net worth calculation. Except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability.
Per the SEC, a director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer, may qualify as an accredited investor.
Yearly Income Greater Than $200,000 USD
How to become an accredited investor according to the income rule is as follows. An individual must have an annual income in excess of $200,000 USD, or $300,000 USD jointly with a spouse.
The individual must have earned this income during the previous two years and expect to earn the same or greater income during the current year. This income test will fail (if applied as a spousal couple) if one spouse made the required income as a single individual for one year and jointly for the other two years.
Businesses with Assets Greater Than $5 Million USD
If an entity has assets greater than $5 million, that entity will be considered an accredited investor. The entity will also qualify as an accredited investor if all of the equity owners are accredited investors.
Investment Advisors and Registered Brokers
The definition of accredited investors was changed in 2016 to include registered brokers and investment advisors.
Individuals who are able to demonstrate sufficient knowledge or experience that indicates their professional knowledge of unregistered securities may also be designated as accredited investors.
With the knowledge presented above, you may now know a little more about how to become an accredited investor.
