Investors can select from many choices. You can buy real estate, stocks, bonds, and other assets to build your wealth. While retail investors have many options, they have fewer choices than accredited investors. Accredited investors are high net worth investors who can access additional investment opportunities not available to the public. You’ll have to meet specific criteria to become an accredited investor. Our guide will reveal how you can become an accredited investor and why you should consider this path.
Accredited Investor in the U.S.
Accredited investors have more experience and resources than the average investor. The U.S. Security and Exchange Commission periodically updates accredited investor guidelines to ensure retail investors don’t assess some of the riskiest assets available. Accredited investors fulfill net worth and income targets to obtain and maintain their status.
Why Should You Become an Accredited Investor?
Accredited investors get exclusive perks from retail investors. The SEC restricts access to high-risk assets such as hedge funds and early-stage companies. You can only buy these higher-risk assets if you are an accredited investor. You can lose all of your money on these assets or generate the return of a lifetime. It’s high stakes, but accredited investors typically have more money to spread and lose. A single moonshot investment can compensate for several investments that become worthless.
How Do You Become an Accredited Investor?
Accredited investors have to fulfill certain requirements before accessing additional assets. Therefore, you will need these financial and professional criteria on your side to qualify.
Financial Criteria
Not everyone can become an accredited investor. The SEC has established several criteria that a person or entity must fulfill. An aspiring accredited investor must fulfill one of the following requirements:
- Have over $1 million in net worth ($5 million for entities). You can achieve this benchmark as an individual by including your spouse’s income if necessary. The value of your primary residence does not count for this net worth calculation.
- An annual income that exceeds $200,000/yr over the past two years. You must demonstrate your ability to maintain this income level. If you use your spouse’s earnings, this higher income total must surpass $300,000.
Professional Criteria
Not every accredited investor makes enough income or has a large enough portfolio to qualify. Some accredited investors reach their status with a FINRA company. Any FINRA-approved designation, credential, or certification will help you become an accredited investor. Investment advisors can use this path to become accredited investors.
Can Entities Qualify as an Accredited Investor
Entities can qualify as accredited investors, but they have higher requirements. We have outlined how entitles can become accredited investors and some of the perks.
Investments
Entities that qualify as accredited investors can invest in venture capital funds, hedge funds, and other assets not available to the public.
Assets
Business entities have higher asset requirements than individual accredited investors. While individuals can become accredited if they own over $1 million in total assets, entities have a steeper requirement. They must have $5 million in assets to become accredited.
Owners as Accredited
Entities can piggyback on an accredited owner’s status. If the entity’s owner is accredited, the entity can also become accredited. Entities with this structure do not need $5 million in assets to qualify.
Investment Advisers
Investment advisers registered with the SEC become accredited investors. An investment adviser’s entity can become an accredited investor even if it doesn’t have $5 million in assets.
Financial Entities
Some financial entities, such as banks and insurance companies, can qualify as accredited investors.
What Investments Can Accredited Investors Access?
The SEC recognizes accredited investors as individuals who can adequately handle more risk. This acknowledgment expands an accredited investor’s opportunities and lets them get exposure to the following assets.
- Venture Capital: Some investors take a long-term high risk, high reward approach with venture capital. You can invest in early-stage startups that can become the next Facebook, go out of business, or perform somewhere in the middle. Venture capital is private equity that provides financing for small businesses and enterprises. Venture capitalists hold their positions for several years before cashing out. Some companies rely on venture capital firms to raise money.
- Angel Investments: Angel investors also provide financial support to early-stage companies that need cash. Angel investors are individuals, whereas venture capital comes from firms. The individual nature of angel investing often leads to lower dollar amounts but more patience from the investor. You can commit less money and still get exposure to high-growth opportunities.
- Real Estate Investment Funds: Real estate investors join forces and pool their money into various assets. These funds do not have to provide cash flow to their investors. They can reinvest the cash flow into additional properties and provide appreciation instead. This distinction separates them from REITs which must distribute at least 90% of their cash flow to shareholders.
- Private Equity Funds: Professionals manage private equity funds and invest in various assets. You can get real estate and other assets without any work. You provide the capital, and a private equity firm generates a return on your investment. Private funds often target long-term assets such as apartments and multifamily real estate. Multifamily real estate is an attractive asset that provides cash flow and appreciation.
- Hedge Funds: Some investors create hedge funds to pool money into various assets. Hedge funds have different rules and can pursue riskier strategies to achieve higher returns. These actively managed funds use derivatives, arbitrage, shorts, and other strategies you may not see in mutual funds. Hedge fund managers set up portfolios like traders. They strive to provide positive returns during up and down markets. Hedge fund managers typically set high fees. They receive 2% of assets every year and 20% of the profits. Hedge fund managers make millions of dollars regardless of how their investors perform. Hedge funds are a high-risk, high-reward investing approach.
- Specialty Funds (Cryptocurrency): Specialty funds address specific asset groups. You can get diversified holdings around a certain theme or type of investment. Accredited investors get access to several specialty funds, including ones that focus on cryptocurrencies. You can invest in a specialty fund filled with established crypto and small altcoins. These funds handle your money and do the research for you, enabling you to focus on other opportunities.
Accredited investors get more choices for how they can allocate funds. Most accredited investors will not pursue all of these choices. Some investors may not like a hedge fund manager’s fees, while others may not like the high-risk nature of venture capital and angel investments. You can find assets that match your risk tolerance and let you explore great opportunities.
