By design, an accredited investor has many more investing opportunities to generate passive income or to potentially achieve capital appreciation open to them than those who aren’t accredited. However, with greater opportunities often comes more unique investments, as the origin of the accredited investor status was to protect investors who could less afford to lose portions of their investment.
The U.S. Securities and Exchange Commission recently expanded the definition of accredited investors. Those whose net worth is at least $1 million individually or together with their spouse at the time of the investment (excluding the value of their primary residence) or whose pre-tax income is at least $200,00 per year (for individuals) or $300,000 per year (for couples) for each of the prior two years are considered accredited (so long as they are also on track to make the same amount (or more) in the current year). Your CPA or lawyer can also verify that you meet the accreditation criteria via a third-party verification letter. There is no application process to “become” accredited.
The SEC also expanded the definition to include people who have a certain level of sophistication in the financial industry, even if they don’t meet the net worth or income test. People with certain professional certifications, credentials, or licenses are considered accredited, as are “knowledgeable employees” of private funds and registered investment advisers with respect to securities being offered by those private funds or registered investment advisers.
When you become an accredited investor, you become eligible to buy certain unregistered securities. Many companies choose to offer their securities only to accredited investors, so they choose not to register them with the SEC or other regulatory agency.
Some examples of unregistered securities may include those issued by hedge funds, private equity funds and venture capital funds and certain real estate investments. Regulators allow accredited investors to invest in them because accredited investors can presumably afford to absorb losses if something goes wrong. You should never invest money you can’t afford to lose.
Newly accredited investors often wonder how to start once they receive that designation, so if you’re feeling overwhelmed, you’re not alone. Here’s a list of some potential opportunities:
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Accredited investors have many more opportunities available to them than those who aren’t accredited, but those opportunities may come with more risks.
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