How to Become an Accredited Investor

This article was originally published on December 19, 2019 and updated June 28, 2022.

If you’ve been looking into alternative investment options, you may have encountered the term accredited investor. Unlike stocks, bonds, and other publicly available investment options, some investments are limited to participation by accredited investors.

Investor accreditation is a special designation in the financial world that is meant to signify a person who has the know-how or capital to absorb higher levels of risk in an investment.

This article explores what it means to be an accredited investor and why it matters. Read on to find out if you meet the qualifications, how to verify your status, and how being accredited could help you enhance your investing strategy.

Contents

• Why does investor accreditation exist?
• What is an accredited investor?
• What is a non-accredited investor?
• How to verify accredited investor status

Why Does Investor Accreditation Exist?

Investor accreditation is, in essence, a way to protect certain people from the risks of certain investments. It’s standardized by the U.S. Securities and Exchange Commission (more commonly known as the SEC), a federal agency that regulates investment markets.

For public investment offerings, such as stocks, the SEC requires the company issuing the offering (also known as the issuer) to file a registration statement. This statement provides extensive disclosures to potential investors about the company’s prospects, leadership team, finances, contracts, business plans, and more.

Private placement Investment offerings, such as those involving private equity, hedge funds, and venture capital, may be exempt from filing a registration statement if they meet certain criteria. Thus, the information they’re required to provide to potential investors is not always as comprehensive.

Because not all investments carry the same disclosures, the SEC differentiates between accredited and non-accredited investors. The purpose is to ensure that:

• the public is not being taken advantage of
• investors in private, exempt offerings are equipped to understand the risks they’re taking
• investors will be able to absorb any losses incurred in connection with a private placement

In short, public offerings are more regulated, so there’s less regulation about who can participate. That generally means any investor, accredited or not.

Conversely, private placements are less regulated, so there’s more regulation about who can participate and what information must be provided to them.

What Is an Accredited Investor?

The SEC’s qualifications for being an accredited investor come from Regulation D, Rule 501 of the 1933 Securities Act.

For an individual to be considered an accredited investor, they must meet one of the following conditions:

• earned income exceeding $200,000
• joint income with a spouse or spousal equivalent exceeding $300,000
• a net worth of at least $1 million, either individually or with a spouse or spousal equivalent (excluding the value of their primary residence)
• holding the status of investment adviser under the Investment Advisers Act of 1940
• certain professional certifications, such as a Series 7, Series 65, or Series 82 license granted by FINRA

With respect to verification of income, an investor must qualify by the same individual condition for at least the past two years, meaning they can’t qualify one year by individual income and the following year by joint income. They’ll also need to be able to prove that they reasonably expect a similar level of income for the current year.

There are other categories of accredited investors that cover entities or organizations. These include:

• a trust or “family office” that holds at least $5 million in assets that wasn’t formed specifically to purchase the securities in question and whose purchase of the securities is overseen by someone “sophisticated”
• certain family clients of a family office meeting the above requirements
• an entity that holds at least $5 million in investments that wasn’t formed specifically to purchase the securities in question or in which all of the equity owners are accredited investors

Accredited Investor Vs. Sophisticated Investor

Sophisticated investor is a somewhat looser designation sometimes used in regulatory language. While accredited investor status is clearly defined, there are no official qualifications defining a sophisticated investor.

According to the SEC, a sophisticated investor is someone with “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”

While the terms “accredited investor” and “sophisticated investor” are sometimes used interchangeably, accreditation status, not sophistication, is the common standard used to differentiate between participants in private investment offerings.

Accredited Investor Vs. Qualified Purchaser

Certain types of private funds are limited to qualified purchasers only. Qualified purchaser is yet another distinction amongst investors and can be thought of as a step up from accredited investors.

The key condition for an individual or family entity to be considered a qualified purchaser is owning at least $5 million in assets. As with accredited investor status, some stipulations apply, such as that those assets may not include a primary residence or a building regularly used for business.

There are a few additional conditions by which investor groups or family trusts can meet qualified purchaser status, which you can explore here.

Benefits of Being an Accredited Investor

The primary benefit of accredited status is access to more, and more varied, investment opportunities. Those opportunities have the potential to result in higher returns and increased portfolio stability due to more diversification.

You also have the opportunity to invest in special interest offerings, such as investing in a small startup you believe in and want to support.

Drawbacks of Being an Accredited Investor

Accredited investors have access to a broader range of investment opportunities, but they also take on more risk. In addition to higher risk, accredited investors may encounter higher investment minimums and potentially high fees.

Private offerings often offer low liquidity, meaning your money is locked into an investment for a lengthy hold period. You may also encounter extra complexity when it’s time to file your taxes.

What Is a Non-accredited Investor?

Put simply, a non-accredited investor is a person who doesn’t meet the financial qualification thresholds listed above. Many non-accredited investors simply say they’re not accredited yet. Keep in mind, accreditation requirements are ultimately designed to protect investors from risk.

There are exemptions from registration such as Regulation D, Rule 506(b) that do allow a limited number of non-accredited investors to participate in an offering.

Further, being non-accredited doesn’t have to stop you from making smart investment decisions and diversifying your portfolio. A good place to start is this guide to long term investments.

How to Verify Accredited Investor Status

While achieving accreditation status is an investing goal for many, it’s ultimately less about becoming accredited than proving that you’re accredited. If you meet the qualifications, you simply need to provide documentation of that fact.

There is no official stamp of approval or membership card that you get as an accredited investor. Instead, the burden of proof lies with the institution you’re investing through. The SEC requires issuers of unregistered securities to take reasonable steps to verify the accreditation status of an investor.

Bear in mind that because your accreditation must be current, you may be asked to verify your status with some frequency, even if you’re investing with the same institution or issuer. If for some reason you were to become non-accredited, your existing investments would generally not be affected by the change in accreditation status.

Accredited Investor Questionnaire

Typically, the institution you’re investing through will conduct an initial screening to determine your accreditation status. It will look a little different with each institution; it may be a single document or a series of questions online. It may also ask for basic identifying information as well as questions about your income or net worth.

This inquiry in itself will not generally be enough to prove your accreditation, and will likely be followed up by a more stringent verification process.

Accredited Investor Documentation

You will need to provide documentation to prove that you qualify. This documentation will need to be independent and recent.

Here are a few examples of documentation investors commonly use to prove accreditation status:

• tax returns
• W-2 forms
• investment account statements
• an accredited investor letter, or a statement from the individual’s CPA, investment advisor, or attorney

It should go without saying that a reputable and trustworthy issuer will do everything in their power to ensure your privacy during this process.

Final Thoughts

Here are the main things you need to know about what it means to be an accredited investor:

• Investor accreditation is regulated by the SEC in order to limit certain investments to those more likely to have sufficient capital and investment experience to take on extra risk, including a risk of loss.
• Investors can qualify as accredited by meeting a certain income level, having a net worth over $1 million, or holding certain professional licenses.
• If you are an accredited investor, it’s usually a simple process to document that fact and start investing in private placement offerings.

There are lots of opportunities out there for accredited investors to diversify their portfolios, from private equity funds to real estate. Land is a lesser-known alternative investment with strong historical performance and low volatility. Start exploring why farmland is a go-to portfolio diversifier for many accredited investors.

Note: The information above is not intended as investment advice. Data referenced herein Securities Exchange Commission, Electronic Code of Federal Regulations, and Company Filings, with additional calculations and analysis performed by AcreTrader. Past performance is no guarantee of future results. For additional risk disclosures regarding farmland investing and the risks of investing on AcreTrader, please see individual farm offering pages as well as our terms and conditions.