With the growing popularity of early-stage investing, and Groove’s work to activate angel investors, individuals often ask, “what is an accredited investor?” Some individuals may want to start angel investing but don’t think they are accredited investors because they have never applied to be one. No one has ever had their hands shaken in congratulation, and they certainly do not have a certificate of accreditation framed in their office. Let’s get into the nitty gritty of what it means to be an accredited investor, the point of it, and the benefits of being one.
Am I an Accredited Investor?
The U.S Securities and Exchange Commission (SEC) is the federal agency that sets the standards for accreditation. To be an accredited investor, you need to meet one of the following criteria:
- Individual income over $200,000 or $300,000 jointly with spouse or partner, over the prior two years and reasonable expectations to be able to maintain that.
- Net worth over $1 million, excluding primary residence. The value of 2nd homes, cabins, or investment properties can however count towards your net worth. Nerd Wallet has a straightforward net worth calculator or your financial advisor likely has a worksheet to help tally up your assets and liabilities.
- Investment professionals in good standing, holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82).
- Other measurements for accreditation based on employment can be found here.
What is the point of having an accreditation standard?
The short of it is investor protection.
Investments fall into two categories: registered and unregistered securities (aka “investments”). Investments such as stocks & bonds purchased through your brokerage or retirement account are generally registered with the SEC. This tends to be expensive, reporting is cumbersome, and information is publicly listed. Companies or funds (which the SEC calls “issuers”) can obtain exemptions from the registration requirements in order to raise money privately. These investment opportunities often include things like venture capital funds, angel investing, private equity investments, hedge funds, etc. Having registration exemptions are vital to private companies, small businesses, and startups being able to raise capital and stay operational.
Regulators still aim to protect investors who invest in unregistered securities in a number of ways including: how the investments are marketed, the investment price point, and who gets to participate as investors. For the sake of this discussion, we are focused on the guidelines around that latter.
The SEC has made accredited investor standards based on who they deem eligible to make these investments, and the basic premise is someone has the wealth and/or knowledge to participate in these types of investments.
I am an Accredited Investor; Now What?
Congrats! You now have the ability to invest in a broader variety of investments and further diversify your portfolio. Once you decide to invest, most often you will have to self-declare your accredited investor status. In practice this means, checking the box as to how you qualify, without providing financial documents to verify your status. In the event, you are asked to submit financial statements or information to verify your accredited status, be sure you are working with a trusted party before sharing personal information.
Being an accredited investor doesn't mean you can invest without inhibition, it simply means you meet the definition. You should always conduct due diligence on investments and practice grounded investing practices, like taking a portfolio approach and diversification.
Lastly, it is important to remember that the SEC does not certify you as an accredited investor, nor can you apply to them to get a certification. They simply set the guidelines for us to determine if we meet them.