In This Article:
(Click on the links below to jump to a specific section)
What Is An Accredited Investor?
An accredited investor is an individual or institutional investor that fulfills the SEC’s financial sophistication criteria to invest in riskier, less regulated assets. This could be an unregistered security such as private equity or a hedge fund.
The US Securities and Exchange Commission defines the following accredited investor requirements for an individual in Rule 501 of Regulation D:
- Net worth should be more than $1 million, alone or as a married couple. According to a passage from Dodd-Frank Act (introduced in 2010), this should not include the value of their primary residence, or
- Income should be $200,000 or $300,000 combined annual income with a spouse in the past two years, with the expectation of meeting the same annual income level for the current year, or
- According to a November 2020 amendment, an accredited investor is:
- A sophisticated investor whom the SEC deems as knowledgeable employees of a private fund;
- An executive officer, director, general partner, investment adviser, or person serving a similar function in a private fund;
- An employee of the private fund or its affiliated management who has participated in the investment activities of that or other funds (or other investment companies) for at least 12 months
- SEC- and state-registered financial advisors and investors who have certain qualifications and certifications can qualify as accredited investors. Examples of the requisite designations include individuals in good standing with the Series 7, Series 65, or Series 82 licenses
Individuals who don’t fall under this criteria are known as non-accredited or unaccredited investors. These guidelines protect them from investments whose risks they may not fully understand or be able to absorb.
How To Become An Accredited Investor
To become an accredited investor, you must satisfy the SEC’s criteria on income, net worth, knowledge level, and affiliations.
The SEC does not certify you as an accredited investor, nor can you apply to them to certify you as such.
However, according to SEC regulations in September 2013, if you qualify to invest in instruments reserved for accredited investors, the responsibility to prove your accredited status falls on the issuer of said investment (investment company).
The issuer of such a fund may present you with a questionnaire for a preliminary assessment of your qualifications.
To complete your accreditation process, you may also need to provide one or more of the following:
- Financial statements and details of other accounts and total assets
- Credit reports confirming your individual net worth
- Tax returns
- W-2 forms and other documents indicating earnings
- Certificates or letters declaring that you are a knowledgeable employee of the issuing fund
- Professional certifications, designations, or credentials administered by the Financial Industry Regulatory Authority (FINRA)
- Review letters from a CPA, tax attorney, brokers, or investment advisor
An easier way to get accredited
As it’s the responsibility of the investment issuers to determine your accredited status, you’ll likely have to prove your status every time you invest in a new investment opportunity.
Luckily, there’s an easy way to avoid going through the same process repeatedly.
Parallel Markets is an investor identity company that helps companies authenticate and verify an individual’s investor credentials. Once you verify your credentials with Parallel Markets, you won’t have to re-verify with every new investment opportunity.
There are two ways to do this:
- Income verification: submit your tax returns, W-2, K-1, or 1099 forms that show an income greater than $200,000 for the last two financial years (or $300,000 if it's joint income with a spouse).
- Net worth verification: submit documents (containing the value of all your assets and liabilities, excluding your primary residence) that prove your net worth (or joint net worth with your spouse) to be above $1M
Valid documents include bank statements, real estate appraisals, brokerage statements, credit reports, etc. They must not be older than 90 days.
If you need to verify your accredited status through an SEC-approved license, provide your Central Registration Depository (CRD) number to the Parallel Markets team.
3 Benefits Of Becoming An Accredited Investor
Not sure if getting accredited is worth the trouble?
Take a look at the advantages of being an accredited investor.
1. Invest in a wider range of assets
Accredited investors can easily access and invest in such highly profitable assets that most other investors can’t invest in. These may include high-risk, high-reward options like oil, private equity fund, or litigation financing.
In fact, Rule 506(d) of Regulation D in the Securities Act of 1993 states that a startup or small business raising capital through private placement can approach an unlimited number of accredited investors. It also does not restrict how much money these investors can put in.
2. Potentially higher returns
Most publicly traded investments are available to non-accredited investors and tend to carry lower levels of risk. This is to protect non-accredited investors from facing losses that they cannot handle. Unfortunately, this can also result in potentially lower returns as a trade-off.
Accredited investors, however, can benefit from highly profitable private investments, that while carrying a higher risk, can also generate far higher returns.
For example, returns from hedge funds, private equity, and other profitable alternative investments can far exceed the returns that a mutual fund or ETFs generate.
3. More scope to diversify
While private offerings for accredited investors tend to be high-risk, they can also help you diversify your portfolio.
Additionally, many of these private investments tend to have low correlations with the stock market, helping you shield your portfolio from being adversely affected by specific market trends.
5 Great Alternative Investment Options For Accredited Investors
The biggest advantage of having an accredited investor status is that you can invest in a range of alternative investment opportunities that most other investors can’t access.
Let’s take a look at what some of these types of investments are:
1. Real estate
Real estate has always been a go-to investment option for investors.
It appreciates steadily over time and can generate passive income.
However, real estate investing usually comes with a mountain of paperwork, tons of hidden fees, and a need for thorough due diligence.
Luckily, accredited investors can now benefit from all the advantages of real estate investments without any of the hassles via real estate crowdfunding.
Real estate crowdfunding platforms and Real Estate Investment Trusts (REITs) pool money from individuals, buy high-income-generating commercial properties, and distribute the returns to investors.
An easy way to invest:
Benefit from commercial real estate by investing with Modiv.
They lease their properties to well-known tenants whose rent generates a monthly income for you. Earn a target return of 12% with a minimum investment of as low as $1,000.
Since Modiv owns the property, you save on any fees to intermediaries. You can also reinvest your dividends to continue growing your investment.
2. P2P lending
Lending has traditionally been a function limited to a financial institution like a bank. But now, investors can lend to investors and earn interest on these loans.
P2P, or partner to partner lending, lets you lend money to individual borrowers or small companies.
Real estate lending companies match you with verified individuals who are raising money to buy property. The interest payments on the money you lend become a steady source of passive income.
An easy way to invest:
If you have an accredited investor status and are new to P2P lending, look no further than PeerStreet. With a minimum investment of just $1,000, there’s a reasonable expectation of a 7-12% return on your investment.
Oil is the most traded commodity in the world and never goes out of demand. An oil and gas portfolio can deliver potential returns of up to 47% along with long-term cash flows for up to 20 years. In the US, oil investments also yield substantial tax benefits.
Unfortunately, oil can be difficult to invest in as an individual investor and is often reserved for large conglomerates and corporations.
An easy way to invest:
Individual investors can take advantage of oil investing with Energyfunders, a platform that lets you invest in oil, gas, and drilling opportunities. With a minimum $5,000 investment, a potential investor can earn monthly dividends from the well’s income.
While most investors look to buy land at some point, farmland remains a relatively unexplored yet profitable niche.
It offers higher total returns than most other real estate investments because it offers you multiple opportunities to earn passive income via rent and sales of agricultural produce.
Unfortunately, like real estate, farmland investing requires high initial investments, tons of due diligence, and extensive upkeep costs.
An easy way to invest:
Farmtogether, a farmland investment platform, will help you invest in profitable farm opportunities.
It lets you invest in farmland for a minimum of $10,000. They carefully select the best farmlands, conduct thorough due diligence, and sell shares in those farms to investors.
They target returns of 8% to 12%, paid out as quarterly or annual dividends, based on the farm’s revenue.
5. Litigation financing
In litigation financing, investors fund the plaintiffs in business litigation cases to receive a share of the expected financial recovery due to winning or settling the case.
An easy way to invest:
Lexshares is a convenient platform for accredited investors to invest in these opportunities and earn a share of the recovery money. You can start investing from $2,500. As of 2020, their median average returns (after fees) were 47%.
Get Accredited Today
Accredited investors have the opportunity to invest in highly profitable investment opportunities that most other investors don’t have access to.
Qualifying as an accredited investor will help you kickstart your accredited investment journey today by getting started with some of the investment opportunities mentioned above.
If you’re interested in learning about more suitable investment opportunities, take the MoneyMade Investor Quiz. Answer a few simple questions, and you’ll get matched with the best investment opportunities for your needs.