Accredited investors have exclusive opportunities available to them that other investors are unable to access. These opportunities can be on the high-risk, illiquid side, but also offer great profit potential if successful. They have also increased in recent years due to the number of startups emerging and the many investors looking for ways to expand and diversify their portfolios. The U.S. Securities and Exchange Commission (SEC) has established the accredited investor requirements for individuals, trusts, and entities.
Individuals
An individual qualifies as an accredited investor by meeting one of the established SEC accredited investor criteria.
These criteria include:
- Net worth: The net worth of the prospective investor individually or jointly with a spouse must be greater than $1 million USD at the time of the investment (excluding the value of the primary residence)
- Income: The income of the prospective investor over the previous two tax return years must have exceeded $200,000 USD as an individual or $300,000 USD jointly with a spouse or spousal equivalent. Also, a realistic expectation must be present for the same or higher income to be earned in the current year.
Beyond the financial tests mentioned above, an individual may meet accredited investor requirements by having certain knowledge as a private fund employee or having certain professional certifications, credentials, and designations. This includes:
- Knowledge: The prospective investor must be serving as a director, executive officer, or other similar position at a private fund, or as an employee of the private fund who has been involved in the fund’s investment activities over the previous year.
- Licensure: The prospective investor must hold a Series 7, 65, or 82 licenses in good standing with the Financial Industry Regulatory Authority (FINRA).
Trusts and Entities
SEC Rule 501 defines the accredited investor requirements as they pertain to trusts and entities. Accredited investors in this category include:
- A trust with assets totaling at least $5 million USD and managed by a sophisticated person – someone with the necessary financial and business knowledge and experience to determine the risks and value of a potential investment. The trust must also have been created to make purchases outside of the subject securities.
- An entity with more than $5 million USD in total investments. The entity must have been created to make purchases outside of the subject securities. All the equity owners of the entity must be accredited investors.
As covered briefly above, Regulation D, Rule 501(a) provides the definition and rules for accredited investors. The regulations established by this Rule could be modified in the future if and when new laws are passed.
