ExecutiveChronicles | Exclusive Investing: What It Means to Be an Accredited Investor | An accredited investor is an individual or a business that handles securities not available to the common public. There is no guarantee that securities have financial regulations by an authority. An accreditor investor can access the securities because of their professional experience, status, assets, net worth, and income. The investors belong to the category of brokers, insurance companies, trusts, and high-net-worth individuals. Unlike the general public, the US Securities and Exchange Commission defines accredited investors under Regulation D to invest in complex securities.
Who Qualifies to Become an Accredited Investor?
The Securities and Exchange Commission defines two criteria to qualify as an accredited investor.
- A person with a gross income of over $200,000 in two recent accounts qualifies to become an accredited investor. It can include a joint account with a partner or spouse exceeding $300,000. Additionally, the same income level or higher is expected in the coming year.
- An individual whose independent net worth or joint account net worth is more than $1,000,000 and doesn’t include the primary residence value.
What are the Reasons for Accredited Investor Requirements?
Every financial regulatory authority facilitates secure investments in the market. Regulators vest their interests in promoting risky venture investments and entrepreneurial activities. This is because entrepreneurial and risky investments emerge as profitable revenue in the future. Such initiatives focus on development and concept-only research activities and have high failure rates. Financial regulation authorities have to safeguard less experienced and less knowledgeable investors. Such individual investors need to understand risky investments and the potential to absorb the risks. Therefore, assessing an accredited investor for their knowledge and experience is pivotal.
How to Become an Accredited Investor?
There is no formal or official procedure to become an accredited investor. The security sellers’ job is to implement steps to authenticate or certify the status of individuals and entities who want to become accredited investors.
- The first step involves the individuals or entities approaching the security issuer.
- The security issuer asks the applicants to respond to questionnaire forms to determine if the applicant is eligible to become an accredited investor.
- The questionnaire demands a balance sheet, financial statements, and account information to authenticate or verify the qualifications.
- The list of data might include review letters from tax attorneys, CPAs, investment advisors, salary slips, W-2 forms, and tax returns.
- Finally, the unregistered security issue assesses the individual’s credit score/report.
By following the above steps, individuals or entities enjoy the advantages of becoming accredited individuals and diversifying their financial portfolios.
Other Ways of Becoming Accredited Investors
Under rare circumstances, executive officers, company partners, and directors play the roles of accredited investors. It is applicable when the organization is an unregistered securities issuer. Sometimes, a financial expert holding FINRA Series 82, 65, or 7 acts like an accredited investor. Additionally, if an individual handles a company trust assets higher than $5 million, he can be the designation of an accredited investor.
Privileges or Benefits of Accredited Investors
Under Federal Securities laws and regulations, accredited investors have the sole authority to participate in unregulated securities offerings. It includes shares in hedge funds, private equity, structured products, and private placements. One of the highlights of becoming an accredited investor is diversifying the investment portfolio. Moreover, investing in regulated and unregulated securities helps to retain liquidity. The terms and conditions prescribed in the client documents indicate reduced investment conditions and audit regulations. Accredited investors avail advisory and discretionary/non-discretionary services from their portfolio managers as long they maintain appropriate disclosures.
Conclusion
From the above analysis, it’s clear that an accredited investor gets a broader scope of choice of investments. They receive treatments like opportunities and relaxed regulations to invest in unique private offerings under their net worth, asset size, trading experience, and governance status. The accreditation of such investors is valid for one year. If an individual is qualified to be an accredited investor, his accreditation is for two years. When an individual or entity explores their profile by unconventional investment methods and taking risks, becoming an accredited investor is the best alternative. People who don’t qualify cannot invest in unregulated or regulated securities.
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