Accredited investors often have access to alternative investments that are not available to other investors. These types of investments can include venture capital, hedge funds, private equity, and angel investments. Before May 2016, equity crowdfunding was restricted only to accredited investors. That’s the time in which Title III of the JOBS Act went into effect. Title III allowed non-accredited investors to make investments in certain deals pertaining to equity crowdfunding platforms. There are tests used by the Securities Exchange Commission (SEC) to evaluate accredited investor status – one of which is the accredited investor income test. However, that is not the only way to qualify.
Who Qualifies as an Accredited Investor?
The SEC offers two tests to determine if an individual matches the standards for an accredited investor and if the investor passes one of the tests, they are considered accredited.
The accredited investor income test is the first test. A qualifying accredited investor must have an income of $200,000 or greater for the past two years with the expectation of that income remaining the same in the current year. Alternatively, if married, an individual can also be accredited if the joint income exceeds $300,000 or more in those same years.
The other criterion is net worth. Accredited investors are required to have a net worth greater than $1 million – this holds true for an individual or jointly with the spouse. Investors may not use the value of their primary residence in net worth calculations.
How to Become an Accredited Investor
Although, there is no formal certification required to obtain accreditation status, the SEC does require “reasonable steps” to be taken to verify their status. This usually involves providing proper supporting financial documentation.
If you are uncertain about whether you qualify as an accredited investor, it’s important to perform a financial inventory that can help reveal the answer either under an accredited investor income test or net worth test. You may want to start by taking a tally of all of your assets. These may include:
* Bank accounts, brokerage accounts, certificates of deposit, and other deposit accounts
* Real estate other than your primary residence
* Annuities
After tallying your assets, subtract the value of your liabilities – this can include auto loans, credit card debt, and other lines of credit or loans you have. Your total net worth must exceed $1 million in order to qualify under the net worth criteria.
If you don’t qualify under net worth, you may qualify under the accredited investor income test. Take a look at your tax returns for the previous two years, including your W-2s and any recent pay stubs. By reviewing these, you may be able to tell whether you land within the necessary income range.
