If you want to invest in certain complex investments, the Securities and Exchange Commission (SEC) requires that you be an accredited investor. To be accredited, you must meet certain requirements regarding your wealth and income as well as your investment knowledge. Take a look at the basic requirements and advantages of becoming an accredited investor.
What Is an Accredited Investor?
An accredited investor is an individual or legal entity allowed to invest in securities that are not registered with the SEC. Accredited investors may be people with high net worth. They may also be legal entities that can include:
- Insurance companies
- Trusts or limited liability corporations (LLCs) with assets over $5 million
- Broker-dealers and brokerage firms
- Legal entities in which every equity owner is an accredited investor
- Indian tribes
- Employer-sponsored retirement plans
- Rural business investment companies
- Government bodies
- Registered Investment Advisor (RIA) entities
- Entities governed by foreign laws
The accredited investor rule is designed to protect less sophisticated investors from risk. Only individuals and entities that have the financial capability to weather significant losses can become accredited investors. The SEC considers that, because of their financial stability and/or investment experience, accredited investors have less need for the protection provided by the disclosures required of regulated investments.
The accredited investor rules, which have been in place since the Securities Act of 1933 was established as a response to the Great Depression, can be found in Regulation D, Rule 501 of that Act. The Securities Act, sometimes called the “truth in securities” law, tightened and established requirements regarding financial disclosure, misrepresentation, and fraud in securities sales to protect investors.
Accredited investors achieve their status through meeting requirements regarding their net worth, income or professional experience. Once accredited, these sophisticated investors may purchase unregistered securities, which are typically sold directly to investors in share offerings known as private placements. The high level of requirements for accreditation is in place because these unregistered investments are inherently risky.
Why Do I Need to Be an Accredited Investor?
If you want to invest in certain investments, you are required to be an accredited investor. Types of investments that are only available to accredited investors include:
- Venture capital investments, angel investments, and other types of private equity investments
- Hedge funds, which typically invest in speculative ventures
- Some real estate investments, including online real estate crowdfunding platforms
- Direct investments in oil and gas
What Are the Requirements to Be an Accredited Investor?
According to the SEC, an accredited investor is someone who either:
- Has at least two years of income of $200,000 ($300,000 if combined with income from a spouse) and expects the same income or higher in the current year; or
- Has a net worth of at least $1 million, not including the value of their primary residence; or
- Holds a valid broker-dealer or investment advisor Financial Industry Regulatory Authority (FINRA) Series 7, 65 or 82 license, as of 2020; or
- Is a general partner, director or officer of the company offering the unregistered securities, or can demonstrate professional knowledge regarding unregistered securities
In addition, legal entities wishing to invest in unregistered securities must meet similar requirements. The organization in question must have assets of over $5 million. However, that organization can’t have been formed just to purchase the unregistered securities in question.
These requirements of income, net worth, or professional experience make sure that inexperienced investors don’t risk money they cannot afford to lose and don’t take financial risks with investments they don’t understand.
How to Get Accredited Investor Status
No actual certification is available to verify your status as an accredited investor. The companies from which you hope to purchase unregistered securities are the entities that verify your qualifications. Neither the SEC nor any other regulatory agency is involved in the process.
When you seek accredited investor status, you’re likely to undergo a screening process. You may have to fill out a preliminary questionnaire asking about your investment background, income, and net worth. Documents you will probably have to produce may include:
- W-2s, tax returns, and other documents verifying earnings over the past two years
- Financial statements and bank statements to verify net worth
- Credit reports
- Documentation that you hold a FINRA Series 7, 64 or 82 designation
- Documentation that you are a “knowledgeable employee” of the entity issuing the securities
The ability to invest as a “knowledgeable employee” of a fund issuing securities or as a financial professional holding an appropriate FINRA license is new as of 2020, when the SEC expanded its definition of and qualifications for accredited investors.
What Are the Advantages of Being an Accredited Investor?
As an accredited investor, you’re able to participate in securities offerings that aren’t available to ordinary investors. These securities are unregistered and unregulated, so they don’t have available the regulatory protections of registered securities.
In general, these investments may be especially volatile or carry with them the potential for significant losses. They include various structured investments, hedge fund investments, private equity investments, and other private placements, all of which are unregulated and may carry significant risk.
The SEC limits investment in these unregistered securities to financially sophisticated investors who understand the risks involved. Of course, these investments are also attractive because in addition to added risk, they carry with them the potential for significant gains, typically higher than those available via ordinary investments.
What Are Some of the Alternative Investments for Accredited Investors Only?
Accredited investors have available to them investments that aren’t open to the general public. These investments include private equity funds, angel investments, specialty investments such as in hedge funds, equity crowdfunding, real estate investment funds, venture capital investments, and direct investments in oil and gas.
Under the SEC’s Regulation D, these investments are exempt from SEC guidelines and regulatory oversight. Companies offering unregistered securities only have to provide documentation about the offering itself plus the location and officers of the company offering the securities. No application process is required (as is the case with public stock, bonds, and mutual funds), and any due diligence or additional information provided is up to the company.
Direct Investments in Oil and Gas
At Aresco LP, we have current opportunities available for direct investments in the oil and gas industry that are only available to accredited investors or institutional buyers. What sets us apart in the industry is our unparalleled communication system available to our investment partners. We firmly believe that well-informed investors make better partners. If you would like information about our current investment opportunities, please fill out the form on this page or contact our office at (972) 992-3127.
The above general discussion is provided for background information only. This information is not intended to be individual advice. Prospective participants should consult with their personal tax professional regarding the applicability and effect of any and all benefits for their own personal tax situation. In addition, tax laws change from time to time and there is no guarantee regarding the interpretation of any tax laws. For more information, please visit www.irs.gov.