An accredited investor is someone who has sufficient knowledge about financial investments and thus may not need the protection that is given by regulatory disclosures. They are people or firms who can deal with securities that are not registered with any financial regulator. This is privileged access and generally, HNIs (high net worth individuals), banks, brokers, and trusts get to be accredited investors
Definition and criteria
The Securities and Exchange Commission (SEC) defines an accredited investor keeping in mind their income and net worth. A person whose income exceeds $200,000 per year in two recent years (or $300,000 if joint income with spouse) can be an accredited investor. Also, a person whose net worth is more than a million dollars (with a value of primary residence excluded) is defined as an accredited investor.
So it is clear that the income earned and the net worth is the criteria to determine whether a person can be an accredited investor or not. While the SEC or any other agency does not certify anyone as an accredited investor, those selling to accredited investors, need to verify their eligibility based on financial documents.
Becoming an accredited investor
If you are eligible to be an accredited investor, on the basis of the criteria of income or networth, then you can buy stock from unregistered companies. When you want to start investing or buying, you would need to provide proof of being an accredited investor.
The SEC has mandated that a questionnaire must be issued by the company. This questionnaire would try to find out if you meet the criteria for becoming an accredited investor. You would need to provide documentary proof of income exceeding $200,000 by submitting tax returns for two years. Or you can provide documents to prove your networth is more than $1million.
You need to fill in all the information in the questionnaire and then sign the form and submit it. Once the company is convinced with your answers, they would deem you as an accredited investor and you can then buy stocks and securities from unregistered firms.
What can you invest in?
Now that you are an accredited investor you can buy into stock which is not registered. What this means is – when a company sells stocks, it is supposed to register it with the SEC. The only exception is if they sell to accredited investors.
An accredited investor can thus legally buy those products which are not in the market and available to the public at large. These securities include:
- Venture capital funds
- Hedge funds
- Private equity deals
- Angel investments
- Private placement of funds
Investing in startups is a booming area in today's world, where there are a large number of new ventures coming up. The SEC restricts investments in startups as it carries a risk. Accredited investors are expected to know the risk and hence are allowed to invest. Investing in startup via angel or VC funding is a great way to make money. Startups can show huge growth, in which case the investors can make big money. This is the biggest benefit of becoming an accredited investor.
An accredited investor is one who has an income of $200,000 per year for more than two years or a net worth of more than $1 million. Accredited investors can buy securities that are unregistered.