Accredited investors can put their money into assets that might not be registered with a regulatory authority. (Getty Images) Written by Miranda Marquit
WHEN RESEARCHING different investment opportunities, you might come across the term "accredited investor." This is especially the case if real estate crowdfunding is of interest to you. Some platforms won't let you participate in certain projects unless you're an accredited investor.
But what is an accredited investor, and how do you become one? Here's what you need to know.
As an accredited investor, you're assumed to have the financial cushion or the expertise and knowledge to be able to handle complex and potentially risky investment transactions. Accredited investors can put their money into assets that might not be registered with a regulatory authority.
In general, securities registered with an authority like the Securities and Exchange Commission are thought to be suitable for most people, and the disclosures and regulation are meant to add a layer of protection to common investors who might not be able to financially absorb huge losses, or who might not have the technical or professional knowledge to navigate some of the offerings.
Accredited investors are assumed to be able to handle the additional risk that comes with assets that aren't regulated in the same way. In order to be considered an accredited investor, you must meet one of the following criteria:
Have a high enough income: If you have made $200,000 as an individual (or $300,000 as a married couple) for the past two years, and you expect to make as much in the current year, you can be considered an accredited investor.
Net worth exceeding $1 million: Your net worth when used as a qualifier, whether married or not, must not include the value of your primary residence.
Registered broker or investment advisor: If you can prove that you have enough job experience or professional knowledge in dealing with unregistered securities, you can be considered an accredited investor.
There are also ways for a business entity to be considered an accredited investor, including having assets worth more than $5 million.
While there are other ways to be viewed as accredited investor, most people who qualify will fall into one of the above three categories.
How can you become an accredited investor?
The good news is that there isn't any official paperwork to fill out if you want to become accredited. The SEC isn't going to come after you and make you fill out a long application. In fact, those in charge of selling the securities are responsible for making sure that you're eligible for accredited investor status.
However, depending on the issuer, you might have to answer a few questions and provide some documentation about your situation. For example, you might have to provide the securities seller with financial statements or a letter verifying your net worth from a certified public accountant. So, even though the government won't be issuing you a certificate, you still need to prove your ability with the entity issuing the securities.
Basically, if you find a private equity fund that you're interested in, or if you'd like to participate in some crowdfunding ventures, you'll approach them and go through the process of proving that you can handle the potential risks. Unfortunately, you'll have to meet the documentation requirements of each issuer of unregistered securities you want to invest with.
For the most part, being an accredited investor allows you access to investments you might normally have access to. Rather than sticking with registered securities, you can use your status to access assets that aren't available to the general public. You can diversify your portfolio with alternative investments, as well as get the chance for serious growth.
However, it's important to understand that unregistered securities also come with their own risks. The potential gains can be quite high with these types of investments, but it also means that you could sustain a big loss. As an accredited investor, the assumption is that you have the financial stability, as well as a certain degree of knowledge, to handle any major setbacks.
If you're considering investing in unregistered securities or thinking about using a real estate crowdfunding platform to find new investment opportunities, take a step back and consider your situation. Make sure that the rest of your portfolio is well diversified and that you have enough financial resources to absorb losses if they come.
There are a lot of great opportunities out there. Many "regular" investors never get a chance to access some of the hedge funds, real estate projects and alternative investments available. If you have built up your net worth and made an attempt to learn about unregistered investments, you might be able to become an accredited investor – and take advantage of opportunities not everyone is privy to.
However, as an accredited investor, you might be taking on more risk and responsibility. Carefully consider where you put your money to work and make sure it's suitable for your portfolio and your financial situation.