What does it mean to be an accredited investor?

I first heard the term “accredited investor” over coffee with a friend who happened to be a financial advisor. He was excited about a real estate deal he was involved in. My interest piqued, I asked him how he finds access to these deals. He said he’d be happy to introduce me to the operators, but I needed to be an accredited investor first.

I had no idea what that meant, other than it sounded like a secret society–the kind where you need a password to even get past the man at the door. So naturally, I asked him, “what’s an accredited investor?” He basically told me that it’s a designation that gives you access to a whole new level of investment opportunities.

As soon as I could, I went home and found out how I could qualify for this secret club. As it turns out . . . it’s not all that secret. In fact, a simple Google search provided me with a definition straight from the SEC.

To be “accredited,” you must:

  • Have a net worth of at least $1 million, not including the value of a primary residence; or
  • Have an annual income of at least $200,000 for an individual, or $300,000 for a married couple. The income bar must have been reached in each of the past two years, and there must be a reasonable expectation that it will continue to be met in the coming year.

Accredited investors can be an individual or entities (company, trusts, banks, etc.), but for the purposes of this post, I’m going to assume most of my audience is classified as an individual. To cut right to it, accredited investors have access to some investments that non-accredited investors do not.

At the time when I learned about this term, I had just finished my training and absolutely did not meet the criteria.

Why does accreditation exist?

The Securities and Exchange Commission (SEC) created this distinction to refer to individuals who are considered “sophisticated investors.” These types of investor may not necessarily require the same protection that smaller or novice investors may need when investing in a project.

It was created as a protective measurement to protect the novice investors from getting into riskier projects, especially because they may not have the fund reserves to handle a loss.

In fact, the SEC uses this label to regulate companies against advertising to or soliciting investments from non-accredited investors. So if you’re a non-accredited investor, you actually shouldn’t even know about some of these offerings. In a sense, this does create a secret society of sorts. For accredited investors, deals get passed around that could be riskier, but they also provide greater opportunities.

Advantages of being accredited

In short, the advantage of being an accredited investor is that you have the opportunity to hear about more deals, get access to them, and ultimately invest in those deals. I’ve mentioned several of these in previous posts, but a few of these unique opportunities may include:

  • real estate syndications
  • real estate crowdfunding
  • angel investing / venture capital
  • hedge funds

Now, some will argue that this whole “accredited investor” thing is just another way for the rich to get richer. The government may have actually agreed with that, and so in 2016, they passed Title III of the Jobs Act. This opened up some of the investments to non-accredited investors — under certain conditions.

Becoming an accredited investor

Once I met the criteria a few years later, I remember wondering if I would be sent a special ID card with the words “accredited investor” in big, bold letters across the front. This card would get me into all of the exclusive opportunities.

Actually, it’s a lot less involved than that. In fact, some places only require self-qualification. You check a box that certifies that you are one (and understand the implications behind it), and you’re in. In other cases, they require you to submit a letter of verification from your CPA, while others may ask you to produce your tax returns. In any case, please only say that you’re an accredited investor if, you know, you actually are one. If you falsely claim that you are, it could cause some legal ramifications down the road for you and the company you invest with.

Summary

Ultimately, it is true that being an accredited investor gets you special access to certain deals. Some deals are a little more out in the open (like crowdfunding) in the sense that you can find them online versus over investor dinners and meetings or passed along at country clubs. However, if you’re actively looking for deals and talking to people in that space, it’s likely that they’ll only talk to you if you’re an accredited investor. That’s not because they don’t like you, it’s because they must keep in compliance with regulations.

So if you do meet the requirement, great! Know that there’s a vast number of opportunities available to you as a result. Some are riskier, but honestly, a lot of good deals are only open to you. If you’re not, don’t worry. There are still tons of opportunities available for everyone.

“Passive Income, MD” is a physician who blogs at his self-titled site, Passive Income M.D.

Image credit: Shutterstock.com

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