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How Do I Become an Accredited Investor?

Posted by Canopy South Capital Management on July 18, 2017 at 7:00 AM

Become Accredited Investor

It stands to reason that accredited investors have the best access to unique investment opportunities ranging from real estate to startups to private placements. But what, exactly is an accredited investor and, more importantly, how do you become an accredited investor? In this post, we’ll discuss everything you need to know about becoming an accredited investor and the benefits that accompany the designation.

What is an Accredited Investor?

An accredited investor is a financially sophisticated individual, trust, bank, or broker who can deal with securities that are not registered with financial authorities. In other words, the designation indicates that the investor is financially savvy enough (and secure enough) not to require the protections provided by regulatory disclosure filings. If, as an individual or as an entity, you can satisfying specific income, net worth, asset size, governance status, or professional experience requirements, then you can become an accredited investor (Investopedia).

Why Do We Have Accredited Investors?

Designated Accredited Investors are a part of an overall regulatory scheme designed to protect our individual wealth and financial well-being as well as that of our nation. The U.S. Securities and Exchange Commission enacted the Securities Act of 1933 to protect investors following the devastating 1929 stock market crash. “Under the federal securities laws, a company or private fund may not offer or sell securities unless the transaction has been registered with the SEC or an exemption from registration is available. Certain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are accredited investors. One principal purpose of the accredited investor concept is to identify persons who can bear the economic risk of investing in these unregistered securities” (SEC).

Are You an Accredited Investor?

DQYDJ estimates that only 8.25% of American households count as accredited investors. While there’s no official certification or SEC registration process, you’ll need to be prepared to prove your income or net worth in order to invest in unregulated offerings. Rule 501 of Regulation D of the Securities Act of 1933 provides a clear definition of an accredited investor.

Here’s what it takes:

  • If, for the past two years, you have an earned income exceeding $200,000 and you can expect to earn at least that much in the current year, then you’re an accredited investor.
  • If you’re married and you and your spouse have enjoyed an earned income of $300,00 for the past two years and can expect to earn a similar amount in the current year, then you qualify.
  • For retirees or for those who cannot qualify on the basis of their earned income alone, if your net worth is over $1 million (excluding the value of your primary residence), then you qualify.

While qualifying on the basis of your earned income is pretty straightforward, determining your net worth is a little more complicated. Essentially, your net worth is everything of value you own (assets) minus what you owe (debts or liabilities). Assets can include cash, investments, retirement savings, your home, cars, art, and real estate. Liabilities and debts include mortgages, car loans, and credit card or student loan debts.

According to the SEC, to qualify on income, you must satisfy the requirements for three years as an individual or with a spouse. It’s worth noting here that you cannot qualify one year based on your individual income and then in the following two years on joint income. (The only exception to this rule is marriage. If you’re married within this three-year time frame, then you may qualify on the basis of joint income during the years in which you were married and as an individual for the years you were unmarried.)

Does Your Entity or Trust Qualify as an Accredited Investor?

If you don’t quite make the individual earned income or net worth cut, there are other ways to achieve accredited investor status. Entities such as banks, partnerships, corporations, nonprofit organizations, trusts, registered brokers, and investment advisors may also qualify as accredited investors. Investopedia reports that “an entity is an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. An organization cannot be formed with a sole purpose of purchasing specific securities. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.”

Is Being an Accredited Investor a Good Thing?

Absolutely! It takes money to make money and accredited investors have access to investment opportunities that others would not. One of the biggest benefits to determining that you’re an accredited investor is the ability to invest in private equity, venture capital, real estate, startups, private placements, and more. Many of these investment opportunities are only open to accredited investors due to restrictions laid out in SEC laws and regulations. Accredited investors have access to investments that, while they may be risky, are often on par with the traditional stock market offerings but have the potential for a much, much higher (and quicker) return.

If you’re an accredited investor and would like to help build great homes, dynamic living spaces, innovative work environments, and community-sensitive real estate developments, contact Canopy South Capital Management. We look forward to hearing from you.

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Topics: Investment Strategy

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