Just about anyone can invest in stocks and bonds, a retirement or custodial account, even real estate or property. But the financial world still has its exclusive clubs.
One such club is for a select group called accredited investors.
What is an accredited investor?
Accredited investors meet high income and net worth requirements that allow them to make investments that are off-limits to the rest of the general public.
Typically, accredited investors can buy and sell securities, or invest in companies or private funds that are not registered with financial regulators, such as the Securities and Exchange Commission (SEC), which is tasked with protecting investors and ensuring that markets run smoothly. For example, accredited investors can buy equity or shares of private companies that are not publicly traded.
Accredited investors are given more leeway to invest than the general public because they have more money, and can afford to lose money with riskier investments. Generally speaking, federal regulators want to protect average investors from sinking all of their money into risky securities and losing it all.
From the SEC: “One principal purpose of the accredited investor concept is to identify persons who can bear the economic risk of investing in…unregistered securities.”
What can and do accredited investors invest in?
Under Regulation D of the SEC’s guidelines, accredited investors can buy or sell securities related to companies or funds that are unregistered with the SEC, or exempt from its regulations.
Generally, this includes private companies and startups. These companies don’t need to make regulatory disclosure filings, so potential investors may not be privy to all of the risks associated with a given investment. Accredited investors, on the other hand, are given the benefit of the doubt, and are allowed to take on additional investment risk.
Examples of what accredited investors may invest in:
- Hedge funds
- Venture capital firms
- Private equity firms
- Private real estate funds
- Startups and other private companies
How do you become an accredited investor?
To qualify as accredited investors, individuals must meet two primary requirements:
- Your net worth (the assets of a single individual, or a married couple) must be more than $1 million, excluding the value of your primary residence.
- You must have earned more than $200,000 ($300,000 for married couples) for the two years preceding when you seek to qualify as an accredited investor. You must also expect to earn the same amount, or more, for the current year.
Some legal entities, such as banks, trusts, and nonprofits, can also qualify as accredited investors. In some cases, an entity is in a better position to make a risky investment than an individual because they likely have more assets and resources—even more than an individual who qualifies and has a high net worth. In those cases, individuals may want to invest through a bank or trust rather than as an individual.
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