I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.
While everyone is encouraged to invest for their financial security, not everyone can invest in every investment product, especially if it’s unregistered or entails a significant amount of risk to the point that you may lose a considerable amount of money.
You may wonder whether being an accredited investor can help you invest in these unregistered types of investments.
An accredited investor refers to an individual or organization that can acquire and invest in unregistered securities and can sustain the risk of loss provided they meet the Securities and Exchange Commission (SEC) criteria concerning income, net worth, and experience in the financial industry.
This article will discuss what an accredited investor is and how to qualify. We’ll also explore investment opportunities that are available to an accredited investor and the pros and cons of this type of investor status.
Why we like StartEngine:
StartEngine allows investors (accredited and non-accredited) to invest in startup companies.
Minimum Investment: $100
Processing Fee: 3.5%
Promotion: 10% bonus shares via the Owner’s Bonus
Requirements to Become an Accredited Investor
The Securities and Exchange Commission is the primary government agency responsible for implementing regulations about accredited investors.
The Securities Act of 1933, Regulation D, Rule 501 has laid out the following requirements for an individual or organization to satisfy to become an accredited investor:
A prospective accredited investor must have had an annual income of at least $200,000 within the past two years. If your and your spouse’s income is combined, then together, you should have had a minimum yearly income of $300,000 within the past two years.
To qualify as an accredited investor, an individual must have a net worth of more than $1,000,000. In computing a person’s net worth, the value of a person’s principal residence is excluded.
Any debt secured by the person’s principal residence will not be considered a liability if the value of the debt is up to the property’s estimated fair market value.
In 2020, the SEC released amendments to the rules governing accredited investors. The amendments require individuals and other legal entities to have professional knowledge, experience, or certifications before becoming accredited investors.
Any individual who wishes to become an accredited investor must have any of the following licenses (all of them are administered by the Financial Industry Regulatory Authority):
- Series 7: The General Securities Representative Qualification Examination (Series 7 Exam) assesses an individual’s expertise in performing the functions of a general securities representative in selling securities products.
- Series 65: Designed by the North American Securities Administrators Association (NASAA), the Uniform Investment Adviser Law Examination (Series 65 Exam) assesses an individual's proficiency in performing a financial adviser's functions. The examination covers statutes, regulations, and other topics essential to the role.
- Series 82: The Private Securities Offerings Representative Exam (Series 82 Exam) evaluates a person’s competency to perform the functions of a private securities offerings representative. A candidate who passes this test can solicit and sell private placement securities products as part of a primary offering.
Best Investments for Accredited Investors
Here is a general list of investment opportunities accredited investors can acquire:
- Private equity: This investment allows accredited and institutional investors to buy private businesses not listed on a stock exchange.
- Venture capital: This form of private equity will enable investors, usually a firm or a group of people, to offer their money to small and startup firms that are believed to have long-term growth potential. Investors may be unable to recoup their money if the business does not go well.
- Angel investments: This form of investment works similarly to venture capital, but the one investing in this type is an individual with an extremely high net worth and independence from other investors since he is doing it alone. In investing, the accredited investor gains equity in the business.
- Real estate investment trusts (REITs): Some companies that own real estate properties like condominiums, apartment buildings, warehouses, and retail malls can establish a trust, pool money from investors, and oversee funds that are being put into various profit-generating properties. Accredited investors can earn income from these holdings without dealing with property management.
- Hedge funds: This investment fund pools money from institutional and accredited investors to buy various investments. It works similarly to mutual or exchange-traded funds, but they use more aggressive strategies to get higher returns. They can also invest in other types of assets some funds cannot, like real estate and art.
- Equity crowdfunding: This type of investment raises capital for a private business from accredited investors in exchange for equity ownership through online means.
Accredited Investor Pros and Cons
Let’s discuss some of the advantages and disadvantages of becoming an accredited investor:
- Ease in meeting requirements: If you have enough income, net worth, and professional experience, you can quickly become an accredited investor.
- Higher returns and yields: Accredited investors can access private investments with higher returns and yields, which can boost their financial health.
- Investment diversification: Accredited investors can expand their investment portfolios by putting money into private investments that are publicly available on the stock market. This provides accredited investors with a competitive advantage over non-accredited investors.
- Access to opportunities unavailable to non-accredited investors: Accredited investors can acquire private investments that are not publicly traded. Non-accredited investors can only invest in what is publicly traded.
- Significant investment risks: While accredited investors have the advantage of acquiring private investments that have higher returns and yields, these investments have much more significant and complex risks. Accredited investors are also exposed to scams due to a lack of regulatory protection from the government.
- Minimum investment capital required: As an accredited investor, you may be required to shell out a higher minimum investment for a private security.
- Lack of liquidity: Some private investments, especially REITs, require long-term commitment with no option of selling them in the market.
- High fees: Private offerings often have high costs, which limits investment returns.
Should I Become an Accredited Investor?
Becoming an accredited investor unlocks access to private investment opportunities that provide higher returns and yields than publicly-traded investments monitored by government regulation.
To achieve this status, you must meet annual income, net worth, and professional investment experience criteria. While becoming an accredited investor boosts a person’s financial health, investing in private investments exposes the accredited investor to substantial investment risks, meaning they could potentially lose a massive amount of money.
It’s essential to weigh your options and learn the potential risks and returns before making an investment decision.
StartEngine allows everyday people to invest and own shares in startups and early growth companies.
I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.More Posts