An accredited investor is an individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. So, How do you become an accredited investor? Let's see.
Accredited investors are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.
How do you become an accredited investor?
There is no special process by which an individual can become an accredited investor. There's neither a government agency nor an independent board that certifies accredited investors.
Instead, companies and financial institutions that issue unregistered securities are required to verify that their investors are accredited by conducting diligence prior to any sale.
If you meet any of the following qualifications, you meet the criteria of an accredited investor. This list is not comprehensive but includes the most commonly used qualifications.
Income-Based: A person who has an annual income exceeding $200,000 (or $300,000 for annual joint income) for the last two years, with the expectation of earning the same or a higher income in the current year. This income test can't be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse.
Net Worth Based: A person who has a net worth exceeding $1 million, either individually or jointly with their spouse. This net worth amount cannot include the value of the person's primary residence.
License Based: A person who holds certain certificates, designations, or credentials, such as Series 7, Series 65, and Series 82 licenses.
Please note that such qualifications may be changed in the future.
Advantages of Being an Accredited investor
The greatest advantage of being an accredited investor is access to investments that may yield higher returns, albeit with higher risk. Some of the other benefits include:
- Greater returns that are not correlated with overall market performance
-Enhanced diversification
- Access to a greater range of investment opportunities
Disadvantages of not being an accredited investor
Unregistered securities are typically high-risk investments, and buyers face a greater likelihood of losing some or even all of their invested capital. Moreover, hedge funds, private equity funds, and the like have high investment minimums. Investors may be required to invest $100,000 or more to participate.
These types of investments have lock-up periods during which withdrawals aren't allowed, so investors must be prepared for the lack of liquidity. Finally, the fees are high; the most common fee structure is the classic two-plus 20 arrangement—a 2 % annual management fee plus a 20% performance fee based on profits.
How Do You Become Accredited Investor? Hopefully, this article can provide you with a better understanding of accredited investors.
