The definition of “accredited investor” is given in the 1933 Securities Act, Regulation D, Rule 501, issued by the SEC. The term refers to investors who possess the financial ability to sustain certain levels of financial loss. There are certain requirements set forth by the SEC that qualify you for accredited investor status. When you become an accredited investor, you gain access to some exclusive types of securities.
Qualifying as an Accredited Investor
An investor can qualify for accredited investor status in multiple ways. These include the income or net worth test. The income test requires a yearly income of $200,000 individually or $300,000 with a spouse for the previous two years with the expectation of achieving the same income level in the current year. The net worth test requires a net worth of greater than $1 million individually or with a spouse, not to include the value of the person’s primary residence. You may also qualify for accredited investor status if you hold in good standing a Series 82, 65, or 7 licenses.
Certain entities with total assets or investments greater than $5 million may also qualify as accredited investors.
Exclusive Securities for Accredited Investors
The SEC added the accredited investor category to allow certain companies an exemption from the requirement to register the securities they offer for sale. The SEC registration requirement is intended to protect those who are not able to become accredited investors from the potential losses they are unable to financially sustain. However, some companies can find these registration requirements a financial burden.
One of the requirements under the exemptions that allow companies to sell unregistered securities is that only accredited investors may purchase the securities. It is assumed that these investors have the financial sophistication to evaluate and handle the risks of making these investments.
The types of investment vehicles accredited investors have exclusive access to include venture capital, private equity funds, and hedge funds. Each of these private funds provides a unique prospectus with the information the issuer decides to share about the investment. When you become an accredited investor and invest in these opportunities, you have the responsibility to evaluate the merits of the investments from this information and any other information you find.