Nearly a century ago, to help protect consumers from some of the risk that comes with investing, the U.S. created the Securities and Exchange Commission. The SEC requires companies seeking investment dollars to disclose significant amounts of information about their structure, revenue, and expenses, so that potential investors can decide whether or not they feel the investment is worth the risk.

But some investors are comfortable with taking bigger risks. They may be seeking to invest in early-stage companies, buy into real estate portfolios, or diversifying with hedge funds whose investment decisions are closely held secrets. For a variety of reasons, the companies managing these kinds of investments may not wish to register with the SEC. 

Regulators have decided that investing in such companies is still allowed — as long as individuals or entities who are looking to invest have demonstrated a significant amount of wealth or financial knowledge. 

These highly qualified investors, known as “accredited investors,” can invest in a wide variety of unregistered securities, which differ from the stock market. The SEC requires that companies seeking to raise these kinds of investment dollars verify that their investors meet certain requirements. If they do, the investors can invest freely in these financial products. 

What is an Accredited Investor? 

Accredited investors are deemed by the Securities and Exchange Commission to be financially savvy, to the point that they do not need as much protection from regulators as ordinary investors. 

Normally, the SEC requires sellers to register their securities and disclose a variety of details about their companies. This is meant to protect investors from being misled or from buying into funds without knowing all of the details about the investment. Most investors’ portfolios are limited to publicly traded stocks and bonds, or funds made up of those kinds of assets, all of which are registered with the SEC,

Only accredited investors, who have specialized knowledge or a qualifying income or net worth, can purchase securities that have not undergone the registration process. These may include private equity deals, hedge funds, venture capital funds, angel investments, and more. 

Companies often decide to offer securities directly to accredited investors rather than registering with the SEC. In these private placements, a company remains privately held while generating investment from highly qualified individuals and entities. 

Who Can Become an Accredited Investor?  

To be an accredited investor, an individual has to meet one of the following conditions: 

• You are a general partner, executive officer, director, or “knowledgeable employee” at the company issuing the securities. 
• Your annual income has exceeded $200,000 as an individual or $300,000 as a married couple for each of the last two years, and you expect it will again this year. Note that you must show proof of income by submitting your tax returns for all three years in question.
• You have a net worth, either individually or as a married couple, of more than $1 million, not including your primary residence. 
• You are a registered broker or investment advisor.
• You have “certain professional certifications, designations or credentials,” such as Series 7, Series 65, or Series 82 licenses. This category was added in summer 2020 and the SEC suggested that other professional certifications could be added to this list in the future.

A entity can qualify as an accredited investor if the value of its assets exceeds $5 million. Entities also qualify if their equity owners are accredited investors themselves — but entities cannot be formed for the sole purpose of buying a particular security. 

Keep in mind that just because someone meets the definition of an accredited investor, it doesn’t necessarily mean that an individual should go and invest a lot of their wealth into these types of investments. The reason why these parameters are put in place is because investments carry risk and there is always a chance your investment could go to $0. 

How Do You Become an Accredited Investor?  

There is no application or formal process to become an accredited investor. Instead, the SEC requires the sellers of unregistered securities to verify that their buyers qualify. 

Issuers typically ask potential buyers to provide documentation of their assets, which could include tax returns, W-2s, financial statements, credit reports, and more. Investors have to reapply for accreditation every year to continue investing in a given fund. If you are unsure about whether you qualify for accreditation, talk to your financial advisor and CPA. 

Depending on the investment, it is very important to be educated and to understand what you are putting your hard-earned money into. If you are unsure on where to start, seek out a financial advisor or other professionals who can help you review and vet these types of deals.