Although most securities people are familiar with, such as stocks and bonds, are registered with the SEC and available to the general public, there is a category of unregistered deals that is restricted to a small population of investors. These “private placement” deals include things like hedge funds, private equity deals and venture capital funds and the type of investor eligible to invest is called an “accredited investor.”
Am I An Accredited Investor?
To be an accredited investor, you must:
- Have made $200,000 in annual income ($300,000 for joint investors) for the last two years with the expectation that you’ll earn the same or more this year, or,
- Have a net worth over $1,000,000, individually or jointly, excluding your primary residence.
- One point of clarification: You can’t mix and match methods of qualification. For example, if a married man with a $500k net worth made $200k two years ago with zero income from his wife and then they both made $150k last year and this year(expected), he would not pass the test. He needs to qualify on his own for all 3 years OR qualify jointly for all 3 years.
What’s the Big Deal(s)?
The primary benefit of being an “accred”, is access to alternative investments that are out of the reach of the average person. Generally, this has included investments such as:
- Private equity deals
- Angel investing
- Hedge funds
- Venture capital funds
However, since President Obama signed the Jumpstart Our Business Startups (JOBS) Act in 2012, a whole new range of alternative investment opportunities opened up to accreds via crowdfunding investment companies. Among these are opportunities to invest in:
- Commercial Real Estate
- Oil and Natural Gas Wells
- Startup Businesses
- Royalty Revenue
- Litigation Finance
- Blue-Chip Artwork
This Seems Elitist, What Gives!
This accreditation requirement isn’t intended to be elitist or exclusionary – the main purpose for the SEC is to protect less experienced investors from unregistered deals that may carry a higher risk and/or require the investor to do more of his or her own diligence. This is not to say that wealthy individuals are always more sophisticated investors, but at the very least, they will have more of a financial cushion to absorb potential losses if things don’t go their way.
How Big Is This Club?
In 2014, the SEC held an event called the Forum on Small Business Capital Formation, and discussed rules for accredited investors. In the presentation, they provided information on the size of the accred pool based on data from the Survey of Consumer Finances (SCF), which is conducted every three years by the Federal Reserve Board.
Based on this data, there were around 12 million households qualifying as accredited investors in 2013 by way of income or net worth.