The Securities Act of 1933, Regulation D, created the term “accredited investor.” When it comes to the individuals, the SEC defines an accredited investor as someone who has either:
- An annual income of $200,000 (or $300,000 for a married couple) for the previous two years, with an expectation of having the same or greater income during the current year, or
- A net worth of $1 million or more, not including the investor’s primary residence
If you have an underwater mortgage, your primary residence may count against your net worth, but it cannot count toward your net worth for the purpose of qualifying as an accredited investor. If you have an underwater mortgage, the portion of your loan greater than the value of your home is deducted from your net worth. Indebtedness that is secured by the your primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability).
Legal entities, banks, and charitable organizations may also operate as accredited investors with their own specific requirements.
Investments Available to Accredited Investors
With respect to the accredited investor definition, accredited investors are qualified to invest in various types of minimally regulated investments that are not subject to many of the SEC requirements.
Because many venture capital firms, private equity funds, and hedge funds utilize Rule 506(c) offerings, they can only receive money from accredited investors. Similarly, in order to reduce their regulatory compliance, numerous lenders will only source funds from accredited investors. For instance, most crowdfunding websites only raise capital from accredited investors, with a few exceptions.
Certifying Accredited Investors
Regarding the SEC rules that govern accredited investors, the issuer bears the responsibility of “taking reasonable steps” to verify its investors as accredited investors. The rules do not require a government agency to issue accredited investor certifications.
Ways to Reach Accredited Investor Status
There are several ways to reach this status. They include:
- Get on a track toward higher income
- Reduce your tax burden
- Continue building passive income
- Live on a reduced portion of your income and invest the remainder
- Purchase investment properties
- Start a side business
- Make investments in a diversified stock portfolio
As you can see, there are various ways to meet the accredited investor standard and qualify for new kinds of investment opportunities. Earning higher income, investing in passive income producing assets, and other methods can move you from middle-class to higher income, which sets you up to qualify as an accredited investor.
