Not everyone is permitted to make every kind of investment. However, accredited investors have access to complicated and slackly regulated investments such as leveraged buyouts, hedge funds, and startup ventures.
In fact, as called for by the Securities and Exchange Commission (SEC), the attainment of accredited investor status comes with income, wealth, or knowledge requirements. But are there advantages of being an accredited investor? Let’s find out.
Who is Eligible to Become an Accredited Investor?
Let’s start there. To fall into the accredited investor camp, you must meet at least one of the requisites below:
- You must have a net worth of more than $1 million either individually or combined with a spouse or spousal equivalent. The proviso here is that the $1 million excludes the value of the chief residence.
- You must have the proper professional certification or designation or relevant credentials. Barring that, you must be deemed a private fund’s “knowledgeable employee.
- During each of the last two calendar years, you must have logged earned income of more than $200,000 — $300,000 if combined with a spouse or spousal equivalent. The person must also be able to show that they will maintain such income levels, at the very least, during the current year. Note here, though, that for all three years, the income requirements must be met as a single person or someone with a spouse.
Why the Stringent Criteria?
Well, the SEC wants to protect investors who may not have the cash on hand to get through major losses. The regulatory agency is looking out for less-experienced investors who could bite off more than they could proverbially chew, particularly since many of the available offerings have substantial minimum starting investments.
What Kind of Products are Available to Accredited Investors?
In general, as with each qualified purchaser, accredited investors have legal access to products that are unavailable to a public that’s more familiar with securities such as mutual funds and stocks and bonds. For accredited investors, such securities include venture capital funds, private equity deals, hedge funds, equity crowdfunding, and angel investing.
How Can Companies Make Sure You’re an Accredited Investor?
Despite the rigidity of criteria, no federal verification process exists for accredited investors. So, what’s a company to do? Well, it falls upon each company to verify the investor status of potential partners before permitting them to invest. How can a company accomplish this? By asking for income and net worth verification. Such verification can include tax returns, proof of securities licensing or employment, or bank and investment statements.
What Are the Advantages of Being an Accredited Investor?
Accredited investors have relatively rigid limits in terms of the investor pool size, which is usually restricted to 100 accredited investors. If the size of the 3(c)(1) fund is less $10 million, that figure can be increased to 250 investors.
Accredited investors do have higher yield opportunities. When an enterprise raises cash independent of public-access markets, it’s usually done as a private placement. Such private placements frequently offer better yields than what’s offered in those public market. Why? Because of the issuer’s access to capital. Accredited investors are allowed to participate in such offerings.
Accredited investors also can diversify their portfolios with alternative assets that aren’t associated with public markets. This reduces risk, especially as interest rates rise.
Now you know all about being an accredited investor, including the advantages. Still, such investors can be limited in terms eligibility and investor-pool size. You may want to check out the platform Yieldstreet, which already offers alternative several investment opportunities that were previously available only to the highest earners or institutional investors.