For the average investor, certain unconventional investment options like hedge funds, venture capital and shares of early-stage startups are out of reach due to regulations built to shield them from uncommon risks. However, these assets can be accessed by accredited investors who prove they have both a significant monetary portfolio as well as an understanding that accompanies investments outside regulated securities.
Accredited Investor Definition
The SEC acknowledges an accredited investor as someone who fulfills at least one of three specifications and is thus authorized to purchase private securities that are not monitored by the Securities and Exchange Commission (SEC). These prerequisites comprise:
An annual income of $200,000 or a combined household earnings of $300,000 must be maintained for the last two years to be eligible.
Entity Net worth
For an entity to be acknowledged as accredited, it should possess at least $5 million in assets or its owners must qualify as accredited investors.
In 2016, the US Congress modified the definition of an accredited investor to include investment advisors and brokers. Nevertheless, an entity cannot be awarded accredited status if it was only established for purchasing unregistered securities.
To have a combined net worth of $1 million or more—excluding the value of their primary residence, either individually or jointly with one's spouse.
The stringent criteria set forth by the SEC are intended to shield inexperienced investors from potentially enduring grave losses. Oftentimes, these opportunities necessitate a hefty initial investment - an amount which might be tough for some to shoulder if they have limited financial resources available. That being said, it's not as though every unregistered venture or hedge fund will lose money; rather, such investments can involve substantial risk due to their requirement of only disclosing basic info about the business opportunity.
What Types of Investments are Available to Accredited Investors??
Accredited investors have the opportunity to invest in:
- Venture capital.
- Angel investments.
- Real estate investment funds.
- Private equity funds.
- Hedge funds.
- Specialty investment funds, like those focusing on cryptocurrency.
How Do Companies confirm an Accredited Investor?
Despite the stringent criteria to become an accredited investor, no federal authentication system is in place. Thus, companies are left with the responsibility of verifying each potential partner's status before they can partake in investing activities. It’s typical for organizations and ventures that deal in accreditation investments to seek verifications of income and net worth including bank ledger sheets, evidence of securities licensure or occupation certification, as well as tax forms.