How to Become an Accredited Investor

If you're looking to become an accredited investor in the U.S. and aren't sure where to begin, this guide will clarify the process, which was updated by the SEC in 2020 to broaden investor eligibility. We'll cover who qualifies as an accredited investor, the benefits of accreditation, and how you can become one.

What is an Accredited Investor?

An accredited investor is an individual or entity legally allowed to trade securities without the same protections as less-experienced investors. The SEC defines accredited investors based on certain financial thresholds or professional qualifications, ensuring they have the knowledge or financial means to handle riskier investments.

Who Qualifies?

Accredited investors must meet one of the following conditions:

1. Net Worth: Individuals or married couples with a net worth exceeding $1 million, excluding their primary residence.
2. Income: Individuals earning at least $200,000 annually ($300,000 with a spouse) for the last two years, with an expectation of similar income in the future.
3. Professional Expertise: Individuals with certain financial licenses (e.g., Series 7, Series 65, or Series 82) or knowledgeable employees of private funds can also qualify.

Why Accreditation Matters

The SEC created the accredited investor status to protect less-experienced investors while allowing qualified individuals to access private investments. These investments often involve more risk but can offer higher returns. Accreditation ensures that investors either have enough wealth to absorb potential losses or the expertise to make informed decisions.

How to Become an Accredited Investor

To qualify, there's no formal application process, but you must provide proof of your financial status or credentials. Verification typically involves submitting documents like bank statements, tax returns, or certification of licenses. You can either receive a letter from your CPA or utilize an online third-party accreditation service (these are often at no cost to you as the investor). To keep from paying CPA expenses, many investors opt for the free online version. Once approved, your accreditation lasts for one year.

Benefits and Investment Opportunities

Accredited investors can access private investment opportunities unavailable to the general public. These include venture capital funds, hedge funds, private equity, and angel investing: alternative investments that can offer higher returns but can come with greater risk.

A Brief History

The concept of accredited investors dates back to the Securities Act of 1933, designed to protect investors while fostering business growth. Over time, the criteria for accreditation have evolved, with changes like the Dodd-Frank Act excluding primary residences from net worth calculations. The recent 2020 update further expanded eligibility by recognizing professional certifications and private fund employees.

Ongoing Thoughts

The SEC continues to debate the requirements for accredited investors. Some argue the standards should be updated to reflect inflationary and income changes. If this update occurs, the criteria would likely become more difficult to obtain accredited status as higher minimum thresholds could be imposed. Regardless of where the debate heads, the goal remains to balance investor protection with the opportunity for high-potential returns.