Aligned Ventures
12/29/2022
Over the years, you’ve likely heard of accredited investors. This term is used to describe an individual or business that meets certain requirements that give them access to more unique investment opportunities as well as the potential for high returns. Regardless of your investment experience, you might be able to qualify as an accredited investor. In this guide, you’ll learn all you need to know about accredited investors and what this designation means for you.
What Is an Accredited Investor?
Accredited investors are individuals or business entities that are allowed to effectively trade securities that might not be registered with authorities like the SEC. This designation is regularly available to high-net-worth individuals and people with ample professional experience in the industry. Two additional factors that are looked at include income and asset size.
The SEC uses the accredited investor term for investors who have strong financials and a reduced need for the kind of protection that regulatory agencies provide. Along with high-net-worth individuals, accredited investors can also be insurance companies, trusts, brokers, and banks.
Keep in mind that certain criteria must be met before you can qualify as an accredited investor. For instance, you may need to have an average annual income of more than $200,000. You could also earn this designation if you currently work in the financial industry. While accredited investors are given the ability to invest in unregistered securities, these securities are considerably riskier since they don’t come with SEC registration disclosures.
How You Can Become an Accredited Investor
Even though you can purchase unregistered securities as an accredited investor, a large number of companies choose to offer these securities directly. The companies that offer these securities are able to save a considerable sum of money by not having to register them with the SEC.
When a company provides these securities, the process is known as a private placement. Accredited investors who choose to engage in a private placement are taking on a large amount of risk, which is why they must be experienced, knowledgeable about the securities, and financially stable to make such an investment.
While the SEC is still involved in the private placement process, they are limited to verifying the qualifications of an accredited investor. Accredited investors are given privileged access to a wide range of investments, which extend to angel investments, venture capital, hedge funds, and deals that involve high-risk investments.
Because of the considerable risk that an investor takes on when they invest in unregulated securities, not every investor who qualifies is willing to apply for the designation.
Accredited investor regulations and requirements are detailed in Rule 501 of Regulation D.2 by the SEC. If you want to be an accredited investor, you’ll need to bring in annual income that’s higher than $200,000 or joint income that’s higher than $300,000. Proof of this income must be provided for the previous two years. You should also have the expectation that you’ll earn the same or higher income for the upcoming year.
When applying for this designation as an individual, keep in mind that you can’t mix and match the aforementioned requirements. If your personal income was higher than $200,000 last year and your spouse’s income was higher than $200,000 the previous year, you won’t qualify for the accredited investor designation.
An individual is also believed to be an accredited investor if their net worth is more than $1 million individually or jointly with a spouse. People can be deemed accredited investors if they are acting as an executive officer, director, or general partner for a company that’s issuing unregistered securities.
A company can be viewed as an accredited investor in the event that it’s an organization or private business development company that has assets of more than $5 million. If the entity has equity owners who are also accredited investors, the entity will be given the accredited investor designation. On the other hand, companies can’t be formed solely to purchase unregistered securities.
Benefits of Being an Accredited Investor
If you’re searching for ways to bolster your investment portfolio, becoming an accredited investor opens up ample opportunities. Many individuals who qualify as accredited investors are completely unaware of the status they’ve earned, which means that they may never understand how they can benefit from it. In general, investing out of public markets means that you’ll have better access and more opportunities when compared to non-accredited investors.
Being an accredited investor gives you higher yield opportunities as well. When companies decide to raise funds outside of public capital markets, they typically do so via a private placement. These placements usually offer better yields when compared to the ones available in public markets.
Accredited investors also have the ability to invest in small businesses and take part in real estate syndication as general partners. There are numerous platforms that are designed to connect investors directly with startups at every stage.
Another key benefit of being an accredited investor is that you can focus on diversifying your investment portfolio. Now that interest rates are steadily increasing, only investing in public markets means that your diversification options will be limited. If you can find alternative assets for your investments that aren’t correlated with the market, you can effectively reduce your risk exposure. These opportunities are always available to accredited investors.
When you make sound real estate investments, earning good and consistent returns is feasible. However, being an accredited investor gives you access to investments that can produce even higher returns. If you meet the aforementioned requirements, you should be able to invest in unregistered securities. However, it’s still essential that you do your due diligence before taking part in any deal or transaction.
To learn more about how passive real estate syndication investing can work for you click the link below and schedule a call with one of our team members to discuss any additional questions you may have and if were the right fit for you.
