The Securities and Exchange Commission has established guidelines that are designed to protect investors from entering into investment opportunities that pose a financial risk that certain prospective investors are not financially able to safely manage. The risk level for accredited investors investing in unregistered securities is higher since these offerings may not reveal relevant information about the company to investors. One of the accredited investor requirements pertaining to net worth, income, professional status, and knowledge must be met to qualify for accredited investor status.
Accredited Investor Requirements
A person who would qualify for accredited investor status must have a yearly income in excess of $200,000 USD over the last two years (or $300,000 USD jointly with a spouse or spousal equivalent), with the expectation of having the same or greater income in the current year. Alternatively, if the individual has a net worth of more than $1 million USD, he or she qualifies as an accredited investor. The calculated net worth must exclude the value of the investor’s primary residence.
Prospective accredited investors may also hold Series 7, 65, or 82 licenses and qualify as an accredited investor.
If an individual directing a trust with a minimum of $5 million USD in assets may qualify if the person is knowledgeable. An entity with all of its equity owners as accredited investors may qualify and an entity with at least $5 million in investments may also be identified as having accredited investor status.
Rationale for the Requirements
The accredited investor requirements hinge on certain financial barometers or the possession of professional knowledge. You can qualify as an accredited investor by meeting one of the financial qualifications or through the possession of sufficient investing knowledge and experience with the specific parameters the SEC has laid out and of which is updated every few years. One of the other will get you an accredited investor status. Either one is recognized as sufficient to provide adequate protection to the investor from significant loss.
The Privilege of Accredited Investor Status
Companies in search of capital to grow their businesses may utilize private placement offerings to accredited investors. These securities offerings are made available exclusively to this class of investor who meets the accredited investor requirements. This special investor status is based on factors the SEC deems important enough such that only this type of investor can withstand the risk involved.
The deals accredited investors may invest in can include angel investments, hedge funds, venture capital, and other ventures of higher risk.
