Are you looking to become an accredited investor in the United States? But, need help to figure out where to begin? Well, for starters, accredited investors invest in unregulated securities. But since these come with high risks, proper expertise is needed. So, understanding the accredited investor concept and what qualifies an accredited investor is critical.
Before we start, becoming an accredited investor is different from taking a loan. Individuals, couples, or entities must fulfill at least one of the SEC's qualifying standards to be considered accredited investors.
We will also go over the background of accreditation, how to become an accredited investor, and the many types of investments offered to certified investors.
Who is an accredited investor?
Most average investors are barred from investing in exotic assets such as venture capital or hedge funds. This is because they are excluded from various laws and regulations designed to protect typical investors from unforeseen and unfamiliar risks.
Accredited investors are permitted to invest in unregulated securities. They need to have the capital and expertise required to manage the high risks associated with these assets.
Establishing the eligibility of accredited investors
There are a few steps you must take if you want to participate in prospects that are only available to accredited investors. If a securities offering is made under Regulation D Rule 506(c), the business administering the investment opportunity must confirm that you fulfill the requirements. They either check net worth or income based on Regulation D criteria.
You will be asked to submit paperwork proving your accreditation status. These area few:
● Bank records
● IRS Form W-2 or Wage and Tax Statement
● Accounts for brokerage
● Your credit report which will reveal liabilities
● Business ownership documents like tax returns plus operating agreement
● Third-party declarations from credible institutions
● Professional certificates or evidence of knowledge
Advantages of becoming an accredited investor?
Per Regulation D of the Securities Act, accredited investors have a choice of investment options that are provided privately. These are not openly available options for the broader investing public. These investments are often riskier. But they have the prospect of bigger returns.
Traditionally, the SEC difference was used to identify persons who are seen to be more sophisticated investors. They are those who don't need as many layers of protection as inexperienced investors with lesser wealth plus less financial skills and experience.
But now, private corporations can provide securities for investment that the public does not have access to.
Among these securities products are:
● Hedge Funds
● Venture Capital Funds (VC)
● Angel Investment
● Equity Crowdfunding
● Opportunities in Private Equity
Accredited investors can also have access to more private investment products.
What qualifies a person as an accredited investor?
The SEC outlines many tests for an individual accredited investor. But, the person currently only has to satisfy one:
● Net Worth
● Professional qualifications or titles
● An employee of private funds who is knowledgeable
Financial tests include earnings and net worth criteria. Also, knowledge tests include professional qualifications or designations and competent personnel.
Two Tests To Become an accredited investor?
A) Financial tests
B) Knowledge Tests
Let us go into more detail about these below.
A) Financial tests
● Income verification
The first method to become an accredited investor is to have a before-tax income of more than $200,000 in each of the two most recent tax return years. Additionally, there has to be a realistic expectation that they will make atleast the same or greater amount in the current and next calendar years.
● The net worth of the individual
The second method to become an accredited investor is by possessing a net worth of more than $1 million. But, this figure does not include the value of their principal house.
The value of your principal dwelling or main home will not be factored into your net worth calculation. But, holiday and investment properties might count as part of your net worth. So, you must provide confirmation of ownership as well as a reasonable value.
B) Knowledge tests
● Professional certificates or designations
Among the new methods to become an accredited investor is to get professional qualifications, distinctions, or other credentials from an approved educational institution. If the individual holds the Series 82, Series 65, or Series 7licenses, he is approved. Furthermore, the SEC can reassess or add qualifications, titles, or credentials in the future.
● Employees of private funds who are knowledgeable
The final major approach for an individual to be considered an accredited investor is to work as a competent employee of a private fund. Knowledgeable employees are defined as:
- A private fund executive officer, director, trustee, general partner, advisory board member, or other individual functioning in a comparable role, or a connected management person.
- A private fund employee or related management person who has participated in the investing operations of the private fund, other private funds, or investment businesses for a minimum of 1 year.
Who else can qualify as Accredited investors Besides Individuals?
The ones listed below can also qualify as accredited investors:
● Financial institutions.
● A company or LLC with total assets exceeding $5 million that was not founded specifically to acquire the securities provided.
● Workers of private funds who are knowledgeable.
● Insurance firms.
Can a person become an accredited investor along with their partner or spouse equivalent?
Yes, a person may qualify as an accredited investor together with their partner or spousal equivalent. And by spousal equivalent, we mean a cohabitant in a relationship typically equal to that of a spouse. Again, this is accomplished through income or net worth financial statements.
If a person and their partner or spousal equivalent have a combined income before tax of $300,000 in the preceding 2 years, they are considered accredited investors. They must also be on course to make the same or more money the next year.
● Net worth
Partners or spousal equivalents are also eligible if their combined net worth surpasses$1 million at the time of investment. The value of their principal property will get excluded from their net worth.
Now that you have a comprehensive understanding of an accredited investor, let's look at the origins of the accredited investor approach.
The Rise of Accredited Investors
Federal authorities were looking for a solution to safe guard investors while simultaneously encouraging new business growth in the 1930s.The Securities Act of 1933 was designed to govern securities offerings and sales in the United States.
The plan was to do this by requiring businesses to register a statement containing a range of facts. This would contain details about the company, its securities, and the specific offering filed with the SEC. Before it could be made available to investors, the registration had to be judged valid.
None the less, authorities wanted to guarantee that just experienced investors with substantial means participated in unregistered securities. These possibilities are exempt from federal and state securities regulations.
The SEC sought to establish a standard of educated, eligible investors with financial qualities. Only accredited investors would be permitted to engage in private securities and private investment offerings. They hoped to achieve a balance that would encourage corporate expansion while also protecting less experienced qualified investors from risky investments. As these standards grow, the knowledge and credentials required become increasingly relevant. This new decision may have a significant influence on the pool of possible investors.
After the financial meltdown of 2008, Obama enacted the Dodd-Frank Wall Street Reform and Protection Act into effect in 2010. It changed the eligibility conditions for investors, namely, the value of a principal property was no longer authorized to be used as part of an individual's net worth.
What is the future of Investor Accreditation?
The SEC has not provided many exact guidelines outlining the amount of professional expertise or needed certificates. But, the commission would assess these additional enforcements regularly and make continuous improvements.
So, it is unclear how much of an influence this will have on the market in the future. Yet, when more eligible investors seek certification, it will be simpler to establish how, if at all, this new rule has grown the market.
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