Accredited Investor Overview

Private markets of unregistered securities can provide high-risk, high-reward investment opportunities. There’s no standard regulation of the private markets – the Securities and Exchange Commission (“SEC”) doesn’t require unregistered securities to list disclosures to investors in the same way that public companies do. As a result, the government only allows a certain subset of the population—those who exceed particular thresholds of wealth or those who hold particular professional licenses—to participate in these private markets. 

The thought, whether or not completely fair, is that a higher income/wealth level or professional certification shows that you are sophisticated enough to understand investments without the investment disclosures required of public companies. It also assumes that you can generally afford to bear more risk than the average investor. 

The ability to invest in these private-market opportunities (including investing in early-stage, private companies) requires at a minimum your getting qualified as an accredited investor, which this article explains. 

By the end of this guide, you’ll understand:

• What is an accredited investor
• What qualifies you to be an accredited investor
• How to prove that you’re an accredited investor
• Actionable takeaways

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What is an accredited investor?

The designation of “accredited investor” gives the sellers of securities the confidence (and legal cover) that you as an investor are sophisticated enough to understand what you are investing in without assistance from the SEC. Sellers of unregistered securities are only allowed to market and sell those securities to accredited investors. 

Note: this is different from getting qualified as a “qualified purchaser,” about which you may have heard. A qualified purchaser is another, higher designation that grants individuals access to new types of investments. Qualified purchasers have an even higher threshold for qualification, defined purely by having a minimum of $5MM total investment holdings rather than basing qualification on net worth, income, or professional license. 

What qualifies you to be an accredited investor?

You can become an accredited investor if you are an individual human (what the courts call a “natural person”) satisfying any of the following criteria:

• Income that is higher than $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the last two years and can reasonably expect the same for the current year
• Net worth of over $1,000,000. This could be either by yourself or combined with a spouse or spousal equivalent (note that your primary residence can’t go towards this net worth figure).
• Are licensed in Series 7, 65, or 82. (Series 7 is the general securities license, Series 65 is an investment advisor license and Series 82 is a private securities offering license.)

In addition to individuals, some entities and trusts also carry accredited investor status. 

Entities (like a fund or a firm) can qualify to be an accredited investor in one of two ways:

• If the total assets of the fund is higher than $5,000,000 and the entity wasn’t formed specifically to purchase the securities
• If all of the individual equity owners of the entity are accredited investors

Trusts can qualify to be an accredited investor if the trust has over $5,000,000 in total investments, and the trust was not formed specifically to purchase the securities. 

Further information about qualification for accredited investors can be found on the SEC website here. 

How do I prove that I’m an accredited investor?

The best method to prove that you are an accredited investor differs for each type of investor. 

For individuals:

• If you use income as accreditation proof, you must have evidence that you have earned the required income for two consecutive years and expect to continue to earn a similar income. This is generally accomplished by providing tax filings or pay stubs. 
• If you use net worth as accreditation proof, you must provide evidence that you have a net worth of at least $1M. This proof will include all documentation related to your personal assets and liabilities which could be found in a variety of places including credit report, IRS forms, deeds for real estate, proof of vehicle ownership or third-party valuation of holdings. 
• If you use a license as accreditation proof, you’ll need to provide the proof of passing your Series exam. If you don’t know if your license is in good standing you can check with FINRA (more information here).

For individuals, entities and trusts, a good way to prove that you are an accredited investor to the issuer is to have a licensed CPA, attorney, SEC-registered investment advisor, or broker review the relevant documents and write a letter (an email is also acceptable) to the seller of securities. 

Actionable takeaways

For everyday investors, be mindful of what you legally can and can’t invest in. Public markets are still a strong source of return and are the right choice for many investors. The “set it and forget it” nature of exchange traded funds (“ETFs”) can also allow you to think more about other parts of your life instead of your investments. 

For accredited investors, you have access to many different kinds of opportunities now. Feel free to take advantage of this opportunity but also be mindful that many of these investments do have a higher risk of failure. For example, most early-stage startups fail! If you feel confident, you can invest in these opportunities, but also make sure to diligence each opportunity and consider personal preferences such as your financial goals and risk tolerance. 

If you’re interested in investing in alternatives (and are an accredited investor), Compound can help. Access curated alternative investments to drive investment returns, manage risk, and generate income through Compound.