Ruby McKenzie
Understanding the Criteria for Accredited Investors is important for private investment businesses. These investment options are typically more risky than the public market. They require a high level of knowledge of investment and substantial financial assets.
The SEC defines an accredited investor as someone with a $1 million income or net worth, excluding the value of their principal residence. These requirements have stayed unchanged since 1982.
Net Worth
As with income, net worth is a requisite for qualifying as an accredited investor. To be eligible, individuals must possess assets valued at $1 million or more, either on their own or jointly with their spouse. However, this calculation does not include the value of their primary residence. To calculate an individual’s net worth, they must add up all of their assets, including bank account balances, retirement accounts (such as 401(k)), physical assets (like cars), and investment properties. They must also subtract all liabilities, including student loans and credit card debt.
To verify an individual’s net worth, firms often request financial documents that provide a clear picture of an individual’s investment portfolio over the past three years. These documents may include recent tax returns, investment portfolio statements, and proof of professional credentials, such as a Series 7, Series 65, or Series 82 license. However, there is no SEC-mandated requirement that firms re-verify an individual’s status as an accredited investor or qualified purchaser.
Income
If married, individual investors must have earned at least $200,000 pre-tax income in the previous two years or $300,000. These statistics must be maintained for three years in a row. To be eligible, the investor must have a net worth of at least $1 million, not counting the value of their primary residence.
Your net worth might comprise any investments, financial accounts (such as 401(k) and IRA balances), physical assets such as automobiles and jewelry, and any other things you own. Liabilities, such as mortgages and loans, are subtracted from your total.
Investors with accreditation can participate in private offerings without registering them with the SEC, saving time and money for both companies and investors. This allows for quick capital injections but also exposes investors to more risks than they might be used to if the company fails or suffers significant losses. For this reason, an investor must understand and can withstand the risk of large financial losses.
Assets
Investors meeting the high income or net worth requirements can tap a world of non-registered investments, including private equity funds, hedge funds, and angel investments. These are often illiquid and therefore require more diligence to understand and evaluate.
Companies that issue these types of investments often must conduct diligence to choose investors who are accredited rather than simply skipping over a simple self-affidavit or form check. They usually request tax forms, bank statements, and other financial documentation to establish accreditation.
The most common verification method for individuals is to display an annual income of at least $200,000 (or $300,000 joint income for a married couple). Investors must prove this for the two most recent years to be verified as accredited. In addition, assets must be accounted for and include more than $1 million, excluding the value of the individual’s primary residence. A person must disclose all purchases, including the importance of retirement, other investment accounts, and physical assets like automobiles.
Liabilities
In the US, an accredited investor is a person or business that meets specific standards based on net worth and income. These investors can invest in private offerings exempt from SEC regulations under Regulation D. These private offerings are often riskier than investments in registered securities. They must be sold to investors who understand their risks and have the financial resources to absorb losses if they fail.
To qualify as an accredited investor, an individual must have an annual income of $200,000 or a net worth of $1 million, not including the value of their primary residence. Entities such as mutual funds and incorporated companies that engage in private capital-raising transactions can also qualify as accredited investors.
Verifying that an investor is accredited can be tedious when dealing with large groups of potential investors. For example, a real estate syndicate could attract over a hundred prospective investors. When dealing with complex situations, it can be challenging for individuals to accurately review their assets and liabilities, potentially leading to errors due to human limitations.
