What is an accredited investor?

Accredited investors can access investment opportunities that aren't available to the general public. But first, they must qualify.

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There are some investment opportunities that are open to the public, such as the stock market. But there are also investments that not everyone can participate in, such as private equity deals, commercial real estate crowdfunding, and venture capital.

Many investments of this nature are limited to a type of individual or entity known as an accredited investor. In this article, we'll discuss what an accredited investor is and what you might be able to do if you meet the criteria.

Sophistication is key

An accredited investor is an individual or entity that has a certain level of financial sophistication.

The idea is that if investment opportunities limit participation to investors who can conduct due diligence and afford to take more risk, there is less need to register with organisations designed to protect individual investors.

In the United States, the regulatory body is the US Securities and Exchange Commission (SEC). The Australian Securities and Investments Commission (ASIC) performs a similar role in Australia.

How do you qualify?

For US individuals, there are three main ways to qualify as an accredited investor:

  • By income: An individual investor can be considered an accredited investor if they have an annual income of at least $200,000 for the past two consecutive years and a reasonable expectation of reaching this income level in the current year. Individuals can also qualify if their income is at least $300,000 when combined with their spouse's income.
  • By assets: Individuals can be considered accredited investors if they have a net worth (assets minus debts) of at least $1 million, not including their primary residence. The $1 million threshold applies to both individuals and married couples.
  • By credential: Individuals who hold a Series 7, Series 65, or Series 82 license are accredited investors.

It's important to point out that to be an accredited investor, you only need to meet one of these qualification standards. For example, a retired person with $2 million in assets and very little income would qualify.

So if an individual had annual income of $220,000 in 2021, $250,000 in 2022, and is on track to earn $275,000 in 2023 but only had a net worth of $200,000, they would qualify as an accredited investor just by income. Additionally, if an investment professional who recently graduated from university passes the Series 7 examination, they could be considered an accredited investor even if their income and assets are far below the thresholds.

Directors, executive officers, or general partners of the company selling the securities are also considered accredited investors, regardless of their income or assets. And there are several ways that businesses or other entities can qualify as accredited investors. For example, corporations with more than $5 million in assets will qualify.

How do you qualify in Australia?

Here in Australia, accredited investors are more widely known as 'sophisticated or 'wholesale' investors.

According to the Federal Government's moneysmart.gov.au website, to be eligible, an investor must prove they have "a gross income of $250,000 or more per year in each of the previous two years" or "net assets of at least $2.5 million".1

What can accredited investors do?

Accredited investors can access investment opportunities that aren't available to the general public. For example, many early-stage start-ups limit investments to accredited investors, and there are many opportunities in commercial real estate available exclusively to accredited investors.

The common theme is that these types of investments have tremendous reward potential. Imagine if you had participated in an early investment round for Meta Platforms (NASDAQ: META), Tesla (NASDAQ: TSLA) or Australia's buy now, pay later pioneer Afterpay, now Block Inc (ASX: SQ2).

Of course, they also have an above-average probability of losing all of their investors' money.

The idea is that ASIC and the SEC want to protect investors who can't afford to take on risks and absorb losses or who don't have the financial sophistication to fully understand the risks involved with investment opportunities.

This is why these organisations closely watch investments such as publicly-traded stocks that anyone can put their money in. In contrast, most investments that are limited to accredited investors are exempt from registration requirements.

How to invest when accredited

This process depends on the issuer of the securities or investment opportunities. Some may verify your accreditation status themselves, such as by asking for tax returns or asset statements. Some may simply ask you to self-certify, while others might use a third-party verification service, such as VerifyInvestor.com.

Whatever the specific process, most companies that offer unregistered investment opportunities take significant steps to ensure that only accredited investors participate. After all, the accredited investor rules are there to protect investors, not the companies taking their money.

Examples of accredited investor opportunities

The biggest example of opportunities available to accredited investors is private equity investments, such as venture capital deals or direct investments in early-stage companies.

You may have heard of investors 'getting in early' on companies such as Stripe, SpaceX, or others that are still private. Well, accredited investors may be able to participate in venture funding rounds led by VC firms.

Commercial real estate investing is another big example. While there are some crowdfunded real estate opportunities available to all investors, in practice, most single-asset deals on platforms such as CrowdStreet are limited to accredited investors.

Article Sources

Sources

  1. Moneysmart.gov.au, "Sophisticated investor"

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Meta Platforms, and Tesla. The Motley Fool Australia has positions in and has recommended Block. The Motley Fool Australia has recommended Meta Platforms. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.