How to Become an Accredited Investor: The Truth About Private Investing
With more and more private companies raising money every day, there are definitely benefits to being an accredited investor. However, there are misconceptions around the process of becoming an accredited investor and whether or not you can be a successful investor without accreditation.
Let’s take a look at what it means to be an accredited investor and alternative ways to access quality investment opportunities without needing accreditation.
What Is an Accredited Investor?
An accredited investor is an individual or business entity that meets certain SEC requirements of wealth (outlined below) to qualify for investing in private businesses. These requirements are meant to qualify whether or not an investor is “sophisticated”, or savvy and financially well-off, enough to make risky investments.
For the sake of this article, we’ll assume you’re not a business entity – so, the basic SEC standards for an individual to qualify as an accredited investor are:
- Any person whose net worth—or joint net worth with that person’s spouse—exceeds $1,000,000 (minus the value of their primary residence).
- Any person who made $200,000 or more in each of the past two years, or $300,000 together with a spouse, and has a reasonable expectation of reaching the same income level in the current year.
As an accredited investor meeting these requirements, you would be able to invest in private offerings like startup financing rounds and private placements. In fact, over the last 85+ years, accredited investors were the only ones legally able to invest in private companies.
These private investment opportunities often present very lucrative potential returns, so being an accredited investor has been a basic prerequisite for individuals who wish to enter the angel investing community.
How to Become an Accredited Investor
The only way for individuals to become accredited investors is to meet one or both of the requirements outlined above. Simply put, it is a cut and dry question of whether or not your salary or net worth is high enough – there is no process, course of study, or aptitude test that can get you there. If you aren’t wealthy enough, that’s that.
Accredited Investor Verification
Believe it or not, no official body, committee, or board exists to verify an investor’s accreditation status. It is up to anyone selling private securities to make sure investors meet these criteria by requiring tax forms, bank statements and other official documents as proof of income or net worth.
An Alternative to Becoming an Accredited Investor
The accreditation standards detailed above were initially put in place following the Great Depression as part of the Securities Act of 1933 to protect unsophisticated investors from making dangerous investments that could cost them their life savings.
Unfortunately, this legislation has led to something of a chicken-and-egg scenario by restricting access to private investment opportunities to already wealthy individuals and institutions – only as few as 6% (and perhaps far fewer) of American adults qualify as accredited investors.
Luckily, several provisions of 2012’s JOBS Act have made private investment opportunities more available to investors in recent years. Not only can private offerings for accredited investors now be marketed to the public, but non-accredited investors can invest in startups via equity crowdfunding platforms like StartEngine.
Now anyone can find private investment opportunities by simply browsing through opportunities listed on a crowdfunding platform’s website.
While becoming an accredited investor is largely a matter of happenstance, there is no denying that the recent increased access to private investment opportunities it carries is a good thing.
We believe that defining whether or not an individual is a savvy investor solely by their income or net worth (as the accredited investor requirements aim to do) is conceptually flawed. An investor’s savvy should be determined by their understanding of the risks associated with an investment, not just their wealth. The JOBS Act has opened the door for equity crowdfunding to democratize startup investing for everyone.