Have you heard of the term accredited investor before? I've heard about it in passing, but I decided to do some research into it. The reason? If you are an accredited investor, investing doors open for you.
Accredited investors have access to unique investment opportunities that regular investors and the general public aren't privy to. Yes, there is actually a class of individuals that gets the "elite" investments.
Do you think it is worth it? Keep reading!
What Is An Accredited Investor?
An accredited investor is determined by the Securities and Exchange Commission (SEC) in the United States, and is defined as an investor meeting the following criteria:
- a bank, insurance company, investment company
- an employee benefit plan
- a charitable organization, corporation, or partnership with assets in excess of $5 million
- a business in which all owners are accredited investors
- a person with a net worth over $1 million, excluding the value of the primary property
- a person with income exceeding $200,000 for the past two years, and a reasonable expectation of making that again this year
- a trust, LLC, or family office with assets in excess of $5 million
- a spousal equivalent (spouses can pool their assets to qualify)
In addition to those criteria, you can be an accredited investor based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution. Currently, those with good standing of the Series 7, Series 65, and Series 82 licenses are considered accredited investors.
Finally, you can be an accredited investor if you're a "knowledgeable employee of the fund" - meaning if you work at a hedge fund or investment fund, and are considered a knowledgeable employee, you can be considered accredited.
Canada has very similar requirements, except that an individual must have both the income and net worth requirements.
Note: Some of these were recent additions from the SEC in 2020.
What Does Being An Accredited Investor Allow?
So, is being an accredited investor worth it (get the joke...)? If you are an accredited investor, you get to have access to some potentially very rewarding, yet potentially risky investments that regular investors just aren't privy to:
- Seed Money
- Limited Partnerships
- Hedge Funds
- Private Placements
- Angel Investor Networks
Just think about Second Market - it is the exchange where individuals who own privately held company shares, such as Facebook, can sell their shares. All buyers must be accredited investors. However, these investors could potentially reap huge rewards if Facebook really does go public.
Why The Definition?
What has always puzzled me is why there even needs to be "accredited investors" as a defined class. I mean, making over $200,000 per year is not that rare any longer, and neither is having a net worth over $1 million. These laws were created in 1933, and I question how relevant they still are. I mean, whether you are an accredited investor or not, it is still essential to do due diligence and research on any investments you make, regardless.
Readers, what are your thoughts on accredited investors?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
Editor: Clint Proctor Reviewed by: Chris Muller