The Securities and Exchange Commission (SEC) was established nearly 100 years ago to protect investors from the risks associated with investing. The SEC requires that companies looking for investment dollars disclose substantial amounts of information about their structure and revenue.
Some investors are more comfortable taking on greater risks. Investors may want to invest in companies at an early stage, purchase real estate portfolios or diversify with hedge funds whose investment decisions are kept secret. Companies that manage these types of investments might not want to register with SEC for a variety of reasons.
These companies are still permitted to be invested in by certain investors, provided that those investors have adequate financial knowledge or substantial wealth.
Accredited investors are highly qualified investors who can invest in unregistered securities that differ from the stock exchange. SEC regulations require that companies looking to raise this amount of investment money verify that their investors meet certain criteria. Investors can freely invest in these financial products if they meet the requirements.
What Does “Accredited Investor” Mean?
The SEC considers accredited investors to be financially smart enough to not require as much protection as regular investors.
The SEC usually requires sellers to register securities and provide information about their companies. This is to prevent investors from being misled, or from investing in funds without fully understanding the investment. The majority of investors have a limited portfolio that includes publicly traded bonds and stocks, as well as funds made up of these types of assets. All of this information is registered with the SEC.
Only accredited investors can purchase securities that have not been registered. These include private capital deals, hedge funds, venture capital funds and angel investments.
Many companies choose to offer securities to accredited investors directly, rather than register with the SEC. These private placements allow a company to remain privately owned while generating investment from qualified individuals and entities. Many of these investors get into alternative investments through a financial services firm that provides them
How Does One Go About Becoming an Accredited Investor?
An individual must meet the following conditions to become an accredited investor:
- You are an executive officer, general partner, director or knowledgeable employee of the company that is issuing securities.
- For each of the past two years, your annual income has been over $200,000 for an individual and $300,000.00 for a married couple. You expect this to continue this year. You must submit your tax returns from all three years to prove income.
- Your net worth is more than $1,000,000, whether you are an individual or married couple. This does not include your primary residence.
- You are qualified as and are registered as an investment broker or advisor.
An entity that has assets worth more than $5 million can be considered an accredited investor. Accredited investors can also be granted to entities if the equity owners are themselves accredited investors. However, entities cannot be created solely for the purpose of purchasing a security.
It is important to remember that even though someone may be an accredited investor, this does not mean they should invest all of their wealth in these types of investments. These parameters were put in place because there are always risks involved with investments.
Accredited investors do not require an application or formal process. Instead, the SEC requires that sellers of unregistered securities verify that buyers are qualified.
Potential buyers are often asked by issuers to submit documentation about their assets. This could include tax returns and W-2s, financial statements, credit scores, and other documents. Investors must reapply each year for accreditation in order to continue investing with a fund. Talk to your financial advisor or accountant if you’re unsure if you are eligible for accreditation.
It is important that you understand the details of each investment. You can consult a financial advisor to help you evaluate and vet these deals if you’re unsure.