Accredited investors meet the criteria set out by the Securities and Exchange Commission, or SEC, to purchase unregistered securities. Accredited investors must achieve certain annual income and asset thresholds. Accredited investors are given greater options than non-accredited investors when it comes to making investments, and it requires money to create money. Although the Securities and Exchanges Commission (SEC) exempts from registration some investments sold by enterprises and private funds to accredited investors, this is the case.

In the highly profitable fields of private equity, investments from private parties, hedge funds, venture capital, & equity crowdfunding, only investors who meet the criteria of "accredited" can put their money to work. However, the SEC establishes the criteria for who may and cannot be an accredited investor and so participate in such opportunities.

The idea that one may go through some "process" to qualify as an accredited investor is widespread but false. There is no credential evaluation by the government or an independent authority and no test or document that proves a person has met the requirements to be considered an accredited investor. Instead, organisations that sell unregistered securities do due diligence on prospective buyers to ascertain their legal standing as investors.

Who Is Eligible to Become an Accredited Investor?

The idea behind the accredited investor laws is that those with a high enough income or wealth level can handle the potential for a complete loss of their investing money without suffering severe financial hardship.

Regrettably, no set of steps exists to qualify as an accredited investor. Accredited investors are not validated by either a government body or a separate board. Instead, before selling unregistered securities, firms and financial institutions must do due diligence to ensure their investors are accredited. Who qualifies as an "accredited investor" may be seen below. Accredited investors include those who fulfil one or more of the following criteria:

Accredited investors must have a track record of at least two years and a minimum yearly income of $200,000 for individuals or $300,000 for couples. They need to show that their revenue is consistent yearly and that they may expect the same or more money next year.

An individual or couple having a net worth of no less than $1 million (not counting the value of their principal house) at the time of investing. After passing the Dodd-Frank Act in 2010, a person's principal house may no longer be counted towards their net worth.

Accredited investors are not limited to those with college degrees; those with specific professional certifications may also participate. Among these credentials are the Series 7, Series 65, and Series 82 licences from the Financial Industry Regulatory Authority (FINRA).

Workers at a firm providing unregistered investments are considered insiders. They are considered to be "informed citizens."

Why is it necessary for you to obtain your investment credentials?

The purpose of the accredited investor exemption is "...to ensure that all participating investors are economically sophisticated and capable to fend for themselves or to sustain the risk of loss," as stated by the Securities and Exchange Commission (SEC). This is done to eliminate the need for the safeguards that come with a registered offering. Regulation D of the Securities Act of 1933, passed as a response by the federal government to the Great Depression, contains the regulations that regulate accredited investors and are governed by SEC Rule 501.

The "truth in securities" legislation is another name for this act, which enhanced the rules for financial transparency and made it so that investors are more aware of the investments they are purchasing. In addition to this, it strengthened the regulations that prevent deception and fraud in the process of selling securities. Here are some instances where only authorised investors can participate:

Putting money into a hedge fund. Due to the high-risk nature of hedge fund investing, only certified investors are accepted.

Putting money into private companies. Accredited investors are needed for most private equity investments, such as venture capital and angel investing.

Service providers for real estate investments online. Accredited investors are restricted from using Crowdstreet and EquityMultiple, two real estate crowdfunding sites.

New businesses financed by venture capital. The increased risks associated with venture capital funds mean only authorised investors are accepted. This is because venture capital funds are not required to provide the same information disclosures as offers registered with the SEC.

Bottom Line

A person can only become an accredited investor once they have met certain criteria. With a few notable exceptions, financial success is the primary criterion. It is generally accepted that those with substantial financial resources have a deeper understanding of and capacity to weather significant financial setbacks.

However, Those that can comply with SEC regulations may reap substantial benefits, including access to a wider range of investment opportunities and the prospect of substantially better profits. Having access to unregistered investments ultimately benefits the wealthy.