Accredited investors are people and entities (such as businesses) with a lot of wealth or specific financial knowledge, and they are allowed to invest in unregistered securities. This designation was created by the Securities Act of 1933 (the ‘33 Act), a federal law governing how companies can market, offer, and sell securities.
The U.S. Securities and Exchange Commission (SEC) is in charge of enforcing the law, and it has occasionally updated the accredited investor requirements over the years. Here, we’ll take a closer look at the requirements for individual investors, or what the law calls “natural persons.”
How to become an accredited investor based on income
An individual can qualify as an accredited investor if they earned over $200,000 each year during at least the two previous years, and if they can reasonably expect to earn the same amount during the current year.
They can alternatively use a joint income of at least $300,000 with a spouse or spousal equivalent—someone who lives with the person and has a relationship that’s similar to that of a spouse. The partners don’t need to have a domestic partnership or civil union for someone to be considered a spousal equivalent.
How to become an accredited investor based on net worth
An individual or couple must have a net worth of at least $1 million to qualify as an accredited investor. A married couple, or someone with a spousal equivalent, can qualify if they have a joint net worth of at least $1 million, even if they don’t have their assets in joint accounts.
Net worth is determined by the sum of assets (e.g., savings accounts, retirement accounts, investments, and even automobiles) minus liabilities (e.g., credit card debt, student loans, auto loans, and other debts). The notable exception in the assets category is the investor’s primary home: the value of their primary residence does not count towards their net worth. In most cases, mortgages (including second mortgages, such as a home equity loan or home equity line of credit) also don’t count as liabilities in their net worth calculation, but there are a few exceptions.
Home loans taken out in the previous 60 days count as a liability. Additionally, if someone owes more than their home is currently worth, the underwater portion of the loan counts as a liability. For example, if their home is worth $300,000 and they have $400,000 in mortgage debt, then $100,000 of the debt counts against their net worth.
How to become an accredited investor based on professional certifications
Investors have been able to qualify based on their income or net worth for decades, but the SEC added a new pathway in 2020. Now, individuals can qualify based on their professional certifications, credentials, or designations.
To qualify, an individual has to pass an exam and hold in good standing one of the following licenses:
- Series 7, which is for entry-level general securities representatives.
- Series 65, which is for investment advisors.
- Series 82, which is for entry-level private securities offerings representatives.
These licenses are for financial professionals, and candidates may need to be employed and sponsored by an eligible company before taking the Series 7 or Series 82 exam. Additionally, someone who passes the Series 65 exam will need to be licensed and working as an investment advisor in their state to qualify as an accredited investor.
Other ways to become an accredited investor
There are several additional pathways for individuals to become accredited investors. However, these may be more restrictive than the other options because the accredited investor status may only apply to specific investments.
- Be a director, executive officer, or general partner of a company selling securities. The directors, executive officers, and general partners of a company that’s issuing the securities may qualify as an accredited investor, along with directors, executive officers, and general partners of the issuer’s general partners. For example, the director or CEO of a private company that’s selling its stock may be able to qualify as an accredited investor to purchase the stock.
- Be a knowledgeable employee of a private fund selling securities. Someone who works for a private fund (such as a hedge fund or private equity fund) may qualify as an accredited investor if they want to purchase the fund’s offerings, or other private funds from the same employer. This includes the fund’s directors, certain executive officers, affiliated persons who manage the fund’s investment activity, and employees who participate in investment activities of private funds. The accredited investor status also applies to a spouse, but not a spousal equivalent, if they’re buying joint investments.
- Be a client of an eligible family office. A family client of a family office with at least $5 million in assets under management (i.e., one that qualifies as an accredited investor) can also qualify as an accredited investor. But the investment decisions must be directed by someone who is knowledgeable and experienced enough to evaluate the risks of investment opportunities.
How can someone verify that they’re an accredited investor?
The company offering unregulated securities is responsible for verifying a buyer’s accredited investor status. If it fails to do so, the issuer may have to give the investors the right to sell back their investments at the original purchase price plus interest.
Issuers may use different methods to verify someone’s accredited investor status depending on the criteria used to qualify as an accredited investor. Some common options include:
- Income-related tax forms. Such as a Form 1040, W-2, 1099, and Schedule K-1 can verify someone’s annual income.
- Documents related to assets and liabilities. Such as recent bank and brokerage statements, tax assessments, and appraisal reports to show the total assets. A consumer credit report from one of the major credit bureaus (Equifax, Experian, or TransUnion) could show liabilities.
- Certifications. The Series 7, 65, and 82 licenses can be verified with the person’s Central Registration Depository (CRD) number and full name.
Accredited investors may alternatively be allowed to send the issuer a letter from a qualified professional who can verify their eligibility. For example, an accountant, attorney, employer, or financial advisor may be able to verify someone’s income or net worth. And for investors who qualify based on their employment, the employer may already have internal documentation that proves the investor’s status.
The bottom line
Becoming an accredited investor can be important for anyone who wants to invest in a private company, such as a startup, or buy other types of unregistered securities. People can qualify based on their income, net worth, professional certifications, or job—and they could lose their status if any of these factors change. With this in mind, companies that sell securities may have specific requirements for verifying accredited investor’s current status.
