In order to qualify as an accredited investor, it is necessary to meet certain criteria pertaining to either income or net worth as specified by the Securities and Exchange Commission (SEC). If you want to invest in certain products outside of what is available to average investors in the stock market, the SEC requires you to pass one or more accredited investor tests to demonstrate that you are capable of doing so.
Becoming an Accredited Investor?
The tests, so to speak, that must be passed to qualify for accredited investor status include:
- Having an earned income greater than $200,000 ($300,000 with a spouse) during both of the previous two calendar years. The person must also state that they expect to sustain this level of income during the current year.
- Having a net worth greater than $1,000,000 either as an individual or with a spouse. This cannot include the value of a primary residence.
If a person has been married for some but not all of the three years, however, he or she may satisfy the rule on the basis of the joint income test for the years during which the person was married and on the basis of the individual income test for the other years.
What is an Accredited Investor?
Per SEC regulations, companies that sell their own securities must register those securities with the SEC before selling them, unless an exemption is met. One of these exemptions is Rule 506(c) of Regulation D, which allows issuers to bypass SEC registration requirements and raise unlimited funds, provided they only sell to accredited investors.
Essentially this means that accredited investors have access to products not offered to the general public. This includes venture capital funds, private equity deals, hedge funds, angel investing, and equity crowdfunding. Although investors must demonstrate that they have the financial capacity to take on the potential risks of the investments, there is no formal testing or training necessary prior to accredited investor certification.
Companies selling securities under Rule 506(c) must take “reasonable steps” to verify all their investors. These companies may use their own screening process to verify a particular individual’s accredited investor status, or they may rely on a third party provider for this service
As part of the process to verify you as an accredited investor, the company or its agent may expect you to provide items such as tax returns, financial statements and details of various accounts, W-2 forms or other documentation that detail earnings, and a credit report to confirm liabilities.
As is obvious, accredited investors have access to a number of different complicated investment products, and there are certain accredited investor tests that help establish the qualifications of an investor to invest in these products.