We did a bit of brainstorming to come up with some topics we think our Stock Watch members and website visitors may be interested in learning about. The first focuses on what it takes to become an accredited investor.
The first time I heard the term accredited investor, I was attending a MoneyShow conference. There were hundreds of people looking for information on investing and booths staffed with investor advocates, financial advisors, and entrepreneurs looking for investors for their products, which ranged from pharmaceutical companies, to oil companies, to products to protect the elderly. If anyone is familiar with Life Alert®, I was very tempted to invest in a copycat company promoting watches that monitored heart rhythms and blood pressure with the capability to alert the next of kin and nearest hospital of one’s need for medical care. Now, years later, I wonder what happened to that company – could I have been on the ground floor of a stellar investment or would I have lost all my money?
Before I could have even invested in this company, I would have to have qualified as an accredited investor. As a company with a speculative product seeking investors to get in on the ground floor, I would have to establish that I was savvy enough to take the risk. Learn how to become an accredited investor below.
What is an accredited investor?
An accredited investor is an individual or entity deemed financially savvy and wealthy enough to understand and sustain the potential losses that come from more complex investment opportunities. The term originated with the U.S. Securities & Exchange Commission (SEC) under Regulation D to refer to investors the SEC deems it does not need to protect from risky investments.
According to the SEC, an individual can be an accredited investor if they satisfy just one of the following:
- have an annual income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent i.e., a cohabitant occupying a relationship generally equivalent to that of a spouse) in each of the prior two years, and reasonably expects the same for the current year
- have a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence)
- holds in good standing a Series 7, 65, or 82 license
- are a director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that company
What are the benefits of being an accredited investor?
Under the federal securities laws, an accredited investor is allowed to invest in unregulated securities, such as hedge funds, venture capital, private equity investments, and early-stage start-ups, which are exempt from the rules and regulations designed to protect investors from unusual financial risk. Investors who meet the requirements of accreditation are presumably financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering.
Having accredited investor status also provides access to high-yield real estate investments. An accredited investor who has access to a broader range of investments may benefit from higher returns and will have a more diversified portfolio because they can invest in private funds.
What are the risks of accreditation?
While accredited investors are able to tap into a vast array of investment opportunities not available to the average investor, there is substantially more risk involved with these investments. Offerings registered with the SEC must disclose certain information to ensure investors are aware of the risks involved in the investment. However, companies and private funds, such as a hedge fund or venture capital fund, engaging in exempt offerings do not have to make prescribed disclosures to accredited investors. There is a greater inherent risk in these offerings of which accredited investors must be aware. With any investment, but likely more in the case of unregistered securities, you could lose it all.
Investments available to accredited investors are not typically traded on a secondary market, so it is more difficult to extricate yourself from them. They may also require large minimums to enter and long-term hold periods, which may lock up an investor’s assets for a significant period, limiting access to funds.
Do I have to be an accredited investor to make money in investments?
No. Any investor is able to invest in publicly traded stocks, bonds, and mutual funds, as well as publicly traded real estate investment trusts (REITS). These investment vehicles are the subject of the SEC disclosure requirements, designed to protect investors from extreme risk. However, there is an inherent risk involved in any investment and investors must always conduct their due diligence to ensure they know what they are getting into and how they can extricate themselves when necessary. Sign up for Stock Watch to get notified today.
– written by Lauren Levi