How to Become an Accredited Investor [And Gain Access to Exclusive Investments]

As you continue to explore investment opportunities, you may come across some offered to "accredited investors" only. You may wonder what an accredited investor is and why they are the only ones who can invest in these assets.

This article will describe how to become an accredited investor and the pros and cons of doing so, plus a few platforms with securities exclusively for accredited investors.

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What is an accredited investor?

Accredited investors are allowed to invest in assets that aren’t registered with the U.S. Securities and Exchange Commission (SEC), which means they can choose to invest in a broader range of assets than the average investor. Rule 501 of Regulation D of the Securities Act qualifies individual accredited investors not by their actual experience but primarily through their total annual income or assets.

While there are many sophisticated investors with lower income levels and smaller portfolio balances and plenty of inexperienced investors who have sizeable incomes and large portfolios, the list below illustrates how the SEC determines if an individual investor qualifies as accredited.

Accredited investor requirements

To become an accredited investor, you must meet at least one of the following conditions:

Earned income

Accredited investors must have had an individual annual income of at least $200,000 in each of the two previous years. Investors can also qualify when their joint income with a spouse or spouse equivalent is at least $300,000 for each of the last two years. In both scenarios, the investor must have a reasonable expectation that their income will meet that threshold for the current year.

Net worth

You may also become an accredited investor when your net worth is more than $1,000,000. Your net worth is defined as the total of your assets minus your total liabilities.

There’s an important caveat, though: The value of your primary residence and any debt secured by your home aren’t included in the calculation. Additionally, if the total debt secured by your home is greater than the home's value, the excess debt will reduce your total net worth for accredited investor qualification.

The $1,000,000 threshold can be based on your individual net worth or joint net worth. The amount is the same for individuals or when combined with a spouse or spousal equivalent.

Professional certifications

Investors can become accredited with the right education and professional certifications. In 2016, Congress began allowing registered brokers and investment advisers to qualify as accredited investors.

The SEC amended the definition of an accredited investor even further in 2020 when it added these additional ways to qualify:

• People who have "certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution" as defined by the SEC.
• “Knowledgeable employees” of a private fund.
• SEC- and state-registered investment advisors.

Other factors

The accredited investor designation is also available for qualifying banks, business development companies, and organizations with assets of at least $5,000,000. Those that do not meet this asset threshold may also qualify if all of the equity owners are accredited investors. There’s an important restriction, though: The qualifying corporation, partnership, trust, or other entity cannot be created for the purpose of investing money in the securities.

Additionally, certain officers of a company issuing securities may also qualify to purchase those securities as an accredited investor. Directors, executive officers, and general partners of a company generally have the sophisticated knowledge of its securities. Therefore, they qualify as an accredited investor, even if they don't necessarily meet the income or net worth requirements the SEC has outlined.

Pros of becoming an accredited investor

Becoming an accredited investor comes with several benefits worth considering, including:

• Access to additional investment opportunities: When you become an accredited investor, you gain access to additional types of investments, such as hedge funds, private equity, private placements, venture capital, real estate crowdfunding, limited partnerships, and others.
• Increased diversification of your portfolio: With access to a wider variety of investments, accredited investors can choose to diversify their portfolios by investing in alternative assets and unregistered securities that aren't available to the average investor.
• Potentially higher returns: Accredited investors have sizeable income and assets that allow them to invest a portion of their portfolios in securities that could provide substantially higher returns than traditional investments. However, just like all investments, these investments come with the risk of loss, too.
• Ability to network with other high-net-worth investors: When you have a high income and a large portfolio, you might be invited to exclusive events where you can network with other accredited investors. These conversations could potentially lead to more career, business, and investing opportunities.

Cons of becoming an accredited investor

While becoming an accredited investor does have its benefits, there are also some important drawbacks to consider, including:

• Volatility. Many securities restricted to accredited investors aren’t listed on stock market exchanges, like the NYSE or NASDAQ, or are lightly traded, which could make them hard to value or subject to increased volatility.
• Illiquidity of many investments. Certain securities may be illiquid, and the lack of liquidity is likely why these securities are restricted to accredited investors. Generally, a qualified investor’s income and size of their portfolio might provide ample cash to cover their needs until they can sell their shares.
• Higher minimum investment amounts. SEC rules often limit the number of investors that certain securities can have without going public, so minimum investment amounts might be higher to ensure that the company has enough money to meet its objectives.
• High fees on products. Large mutual funds and ETFs are generally able to offer lower expenses because they have a significant client base. Securities restricted to accredited investors may have fewer investors, so the expenses are spread among a smaller number of people. This could lead to higher expense ratios and fees on these alternative investments.

FAQs

The bottom line

Becoming an accredited investor opens up a variety of investment opportunities for you to diversify your portfolio and potentially earn a higher rate of return. Most investors become accredited based on their income or net worth; however, you can also become accredited by holding certain licenses or having specific knowledge about the investment.

While these securities offer attractive benefits, they are not without their risks and pitfalls. If these investments seem appealing to you, it could be wise to start slowly and only invest a small percentage of your overall portfolio.