What is an Accredited Investor?
The bottom line truth about any investing is that it takes money to make money. You need to have a certain level of funds to participate and realize substantial returns. What some people don’t realize is that if you meet certain criteria, you can qualify for investments that others don’t. That status is what the Securities and Exchange Commission (SEC) refers to as an accredited investor.
Am I an Accredited Investor?
The SEC governs who can and cannot sell and purchase securities, and which investments must be registered with the SEC. These rules, while complicated, exist for a reason. They help prevent fraud and protect investors from making financially irresponsible decisions. There are some qualified investors however, that are granted exceptions to these rules due to their proven financial status.
According to federal securities laws, Private funds and companies are required to register any securities transactions or sales with the SEC, unless it qualifies for certain exceptions. One such exception is for what the SEC refers to as accredited investors. The exception is found under Regulation D and pertains to investors that are financially secure and have less of a need for the protection provided by regulatory disclosure filings.
An accredited investor can be a natural citizen, banks, or insurance companies. Trusts and brokers can also be accredited. In order to qualify as an accredited investor you have to prove a certain level of wealth, either through salary or personal holdings. Again, the SEC has rules in order to prevent fraud and risky investments, so the title of accredited investors exists to identify those with the capability to bear the economic risk of investing in unregistered securities.
How Do I Qualify as an Accredited Investor?
As mentioned, accredited investor verification requires investors to demonstrate a certain level of financial security that allows them to absorb economic risks involved with unregistered securities. The first step in accredited investor verification requires the individual or entity to prove their wealth through one of several ways. CrowdStreet produced a helpful infographic to help demonstrate the steps to verify the various sources or varieties of qualifying financial holdings.
In the case of a natural person, an accredited investor must have an annual income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expect the same for the current year. A natural person also qualifies as an accredited investor if they have a net worth over $1 million, either alone or together with a spouse, excluding the value of the person’s primary residence.
Taking into account joint incomes and spousal net worths can sometimes be tricky. A qualified investor must satisfy the requirements for three consecutive years either alone or with a spouse. Qualified investors cannot satisfy the requirements one year based on individual income and the next two years based on joint income with a spouse, unless the individual is married within that period.
How Do Entities Qualify as Accredited Investors?
Entities such as banks, partnerships, corporations, nonprofits and trusts can also be accepted as accredited investors if they fulfill certain requirements. An entity becomes a qualified accredited investor in a couple of scenarios.
- If a private business development organization or investment company holds assets in excess of $5 million, and it’s purchases are directed by a sophisticated investor.
- An entity also qualifies if it consists of equity owners who are accredited investors.
The term sophisticated investor is important here. In the eyes of the Securities and Exchange Commission, a sophisticated investor is an investor that has, or the company offering the securities reasonably believes has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
How Does Net Worth Affect Becoming an Accredited Investor?
As an individual, one way to verify your qualification as an accredited investor is under the net worth clause. Again, that means that your net worth exceeds $1 million dollars, either alone or in combination with your spouse. As you begin to account for your holdings there are certain specifications you will want to keep in mind.
For starters, calculating your net worth is as easy as adding up all your assets, and subtracting your liabilities. Assets include property, investments, cash and other things you own, while liabilities include loans, mortgages and any debt. If you are calculating your net worth with your spouse it’s not necessary that your properties be held jointly. It is important however not to include your primary residence in your net worth. This rule was put in place with the Dodd Frank act in 2010, and may have affected your previous standing as an accredited investor.
Let CrowdStreet Verify Your Accredited Investor Status
Status as an accredited investor is required for most offerings on the CrowdStreet marketplace, and some require that investors be qualified purchasers as well. In order to help you begin investing, we’ve prepared guides and templates to help you navigate the verification process. These guides can help you determine the criteria for designation of each investing type. This includes individuals, self directed IRA accounts, joint tenants, trusts, and business entities like LLCs, corporations, or partnerships.
CrowdStreet has two ways to proceed with verifying your accredited status.
- Use VerifyInvestor.com via the CrowdStreet Transaction Center – provided for free to CrowdStreet investors
- Use a qualified, independent third party verifier, such as your CPA, attorney, or wealth advisor
With our integrated access through the CrowdStreet platform to VerifyInvestor.com, CrowdStreet is pleased to be able to absorb the cost of this service on your behalf. To use VerifyInvestor.com, you should follow the link in the Transaction Center, which becomes available after submitting closing documents for a given offer. If you have any questions about the process or required documentation, you may contact VerifyInvestor directly by emailing email@example.com.
If you wish to verify your status through a qualified, independent verifier you will need them to complete an investor verification letter. You can download a template for an investor verification letter here. Qualified parties under the SEC rules would include your CPA, attorney, or wealth advisor attached to a registered broker-dealer. Once the qualified party has completed your letter, you may upload it to your CrowdStreet Transaction Center.
Verification of accredited investor status is not required to register for CrowdStreet, so you are free to browse listings right away. Once you’ve found a listing you are interested, or received your verification, you can update your CrowdStreet profile to reflect your accredited investor status. You’re only required to prove your accreditation when you submit an offer, but can register and view all listings simply by registering for the CrowdStreet platform.
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