Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.
- Understanding accredited investors
- Accredited investor criteria
- How to become an accredited investor
- Key takeaways:
- Connected Business Concepts
Understanding accredited investors
To explain this concept further, consider that any company wanting to offer its securities must choose from one of two options:
- It can operate as a publicly-traded entity where it must release quarterly earnings reports to shareholders and the general public. This requires registration with the Securities and Exchange Commission (SEC).
- Alternatively, it can remain privately owned. In the process, the company can avoid the obligations of a publicly-traded entity but continue to trade with an exemption. One such exemption is the ability of the entity to sell securities to an accredited investor.
Accredited investor criteria
So what is an accredited investor, exactly? According to the SEC, the individual must satisfy at least one of the following three criteria:
Possesses professional qualifications or other credentials that demonstrate competency
This criterium can be satisfied if the investor is deemed a “knowledgeable employee” of an investment fund. Alternatively, the SEC offers entry exams for general securities and private securities representatives who wish to become certified.
Has earned at least $200,000 per year for each of the past two years
This number increases to $300,000 in the presence of a spouse or spousal equivalent.
Has a net worth exceeding $1 million, either by themselves or in combination with a spouse or spousal equivalent
Note that this number excludes the value of the individual’s primary residence.
How to become an accredited investor
While the criteria for accredited investor certification are strict, there is no formal verification process for becoming such an investor. This means it is up to the individual company to screen an investor’s credentials before allowing them to invest.
As part of the screening process, most will request proof of income from a tax return and proof of net worth from a credit report. Furthermore, the company will also request to see evidence that proves an investor’s prior experience and qualifications in the industry.
- Accredited investors are individuals or entities that are permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.
- Accredited investors must satisfy at least one of three criteria that relate to prior experience and qualifications, individual and spousal income, and individual and spousal net worth. In the United States, these criteria are determined by the SEC.
- There is no formal process to becoming an accredited investor. Instead, it is up to the company the investor wishes to invest in to screen their credentials before allowing them to invest.
Connected Business Concepts
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