What Is an Accredited Investor? (And How to Become One)

Accredited investors get exclusive access to many of the most lucrative investments. But what is an accredited investor, and how do you become one?

What Is an Accredited Investor?

An accredited investor is an individual or entity that’s allowed to participate in certain investments that aren’t registered with the SEC (Securities and Exchange Commission). These unregistered offerings are called “private placements.”

Ok, So What’s a Private Placement?

Let’s travel back in time.

In the Roaring 20s, frequent financial finagling helped contribute to the Great Depression. In response, Congress created the SEC in 1934. The SEC’s main job is to protect investors and promote capital formation.

To carry out its purpose, the SEC requires companies (often called “issuers”) to register their securities before selling to the public. Shares of public companies like Apple, Home Depot, and Amgen are registered with the SEC.

Registering securities involves lots of disclosure regarding financials, management, and business structure. The idea is that everyday investors need all of this information to make good investing decisions.

However, registering with the SEC takes lots of time…and money. You’ll have long nights, large legal bills, and knots in your back.

Enter the private placement.

In a private placement, issuers can sell their securities without registering with the SEC. Offering securities in a private placement requires an exemption from registration.

One of these exemptions is Rule 506(c) of Regulation D, which allows issuers to sell securities without registering with the SEC, so long as all the buyers are accredited investors (along with other requirements).

The idea is that these accredited investors (you can say it with a snobby accent if you’d like) don’t need all the disclosure that comes with SEC registration. Accredited investors can handle themselves.

Why You Want to Be an Accredited Investor

There are plenty of accredited investors out there. As a result, many businesses sell their securities exclusively to accredited investors to avoid the headache of registering with the SEC.

As a result, there’s a sea of lucrative investments available only to accredited investors. If you want to get access to the back room of fancy finance, you need to get accredited.

How to Become an Accredited Investor

The definition of “accredited investor” is in Rule 501 of Regulation D. Following new SEC rules, there are now 13 different ways you can be an accredited investor.

Types of accredited investors include the following:

Net worth: Individuals with a net worth (along with their spouse) of at least $1 million. The value of a primary residence (and mortgage) doesn’t typically count.
Income. Individuals who make at least $200,000 per year (or at least $300,000 per year along with their spouse).
Large entities. Certain entities with at least $5 million in assets.
Insiders: Directors, officers, or general partners of the issuer.
Groups: Entities where all of the owners are accredited investors.

So, at the end of the day, there are two main ways you can become an accredited investor:

Become an insider
Make more money

Let’s take each in turn.

1. Become an Insider — Company-Specific Accredited Investor Status

Forming your own corporation, LLC, or investment fund is a great way to become an accredited investor because your income is irrelevant. If you’re the CEO of a rising tech company, the general partner of a real estate fund, or a director of a yoga studio, you can buy unregistered securities of your business.

If you’re thinking of starting a business and need to choose a legal entity, check out this article (it’s geared toward real estate investors but the principles apply to any business).

Note that being an insider makes you an accredited investor only with respect to the company where you’re an officer, director, or GP. Naming yourself CEO of a newly-formed S-corp doesn’t mean you can go around buying unregistered securities of other companies.

2. Make More Money — Generally-Applicable Accredited Investor Status

To access the full suite of private placements the world has to offer, you’ll likely need to boost your income or net worth. Once you have a net worth of $1 million or an annual income of $200,000 ($300,000 with your spouse), you’ll get the green light to start investing broadly in private placements.

You Don’t Always Need to Be Accredited to Invest in a Private Placement

Here’s the fine print. Rule 506(c) is only one exemption from SEC registration. Other exemptions, like Rule 506(b) of Regulation D and Regulation A, permit unregistered sales to non-accredited investors. We’ll cover these exemptions in future articles.

So, while being an accredited investor certainly helps, it’s not always necessary to invest in a private placement. It all depends on which exemption the issuer is using to avoid SEC registration.

Need Help With Securities Laws?

Dealing with the SEC can get a little complicated. Luckily, I have experience helping companies large and small navigate the challenges of selling (and buying) securities. If you’re looking to raise money for your business, reach out today.