The basic concept of an accredited investor is an individual or an entity that meets certain financial requirements. Individuals with accredited investor status have access to specific investment opportunities that are not subject to SEC registration requirements and that are understood to carry higher risks than other publicly available opportunities.
What is Accredited Investor Status?
An accredited investor should have the ability to understand and evaluate investment opportunities and can do the necessary homework in advance before making the investment. These investors are generally considered more financially savvy than the average investor.
Accredited investors generally have more financial cushion to handle losses due to failed investment outcomes. These individuals are either high income or high net worth investors.
Hedge funds, along with many venture capital and private equity deals, are restricted to accredited investors. In addition, most opportunities in crowdfunded real estate are only accessible to accredited investors.
Individuals seeking accredited investor status may qualify through the income or net worth requirement. Per the income requirement, an accredited investor must have a yearly income of more than $200,000 USD individually or $300,000 USD as a married couple. This income level must have existed for the previous two calendar years, and there must be a reasonable expectation this income level will be reached in the current year.
Per the net worth requirement, to be an accredited investor, an individual or married couple must have a net worth greater than $1 million USD, not including the value of their personal residence. The net worth method also deducts any liabilities the investor has from their assets. This equates to having at least $1 million USD in investable assets.
Why Does Accredited Investor Status Matter?
The accredited investor verification standards governing the use of unregistered investment opportunities are designed to protect the individual investor. Therefore, the process used by investment companies to verify accredited investor status can be quite comprehensive.
Investments that are reserved exclusively for accredited investors carry with them elevated risk as a result of a lack of transparency required by the investment companies. Also, investment opportunities involving private equity, crowdfunded commercial real estate, and hedge funds are generally riskier than other opportunities available to the general public. This makes verifying the accredited investor status of individuals seeking to participate in these opportunities so important.
