The Securities Act of 1933 was created in response to what was perceived as the Wild West of people creating securities and selling them to unsuspecting people who then lost money. Security is simply a representation of ownership in something. Certain individuals were selling stocks in companies that were never designed to make money. The sellers get the money from the investors and never paid them back. Of course, this was the rarity, but the newly formed SEC created the notion of accredited investor in part to combat this.
The name seems like you would have to pass a test or get certified by the government in order to proudly proclaim that you are accredited. The contrary, it’s really more of a self-designation, but it does have a few rules.
The reason the accredited investor status was created was to separate those who had more wealth from others. This theory went that if someone had more wealth than they must know more about money and as such be smarter in investments. The writers of the bill would then allow these smart investors to take more risk. If they deemed you weren’t smart enough, i.e. wealthy enough, to take that risk and you couldn’t be accredited.
The definition of accredited investor has changed from time to time and some have advocated to change it to more of a financial intelligence measurement rather than simply wealth. This would allow more individuals to invest in otherwise off limits deals. Right now being in accredited investor is fairly exclusive and only certain people can invest in securities that require accredited investors. Determining what makes that security require accredited investors or not is outside of the scope of this post.
Things Required to be an Accredited Investor
To become one, you only need to have one of the following be true. If you do this, congratulations! You are an accredited investor! You can invest in almost any deal out there.
- Your personal income was $200,000 or greater for each of the two past years and you have a reasonable expectation of the same for the next year. If you are married that number becomes $300,000 jointly.
- Your net worth is greater than 1 million. For this calculation you must exclude the value of your primary residence.
Most accredited investors qualify because of #1 or #2, but here are some other ways to do it:
- Hold a Series 7 general securities representative license, investment adviser representative Series 65 license, or Series 82 private securities offerings representative license.
- Become a general partner of a company selling securities. If you become a syndicator sponsor, you can invest in your own deals requiring accredited investors. Real Estate Investors should look to this one if they don’t meet one of the two financial criteria above.
- Become a family client of a family office that qualifies as an accredited investor. This is an office that runs the family business investments. These are usually wealthy families that probably already qualify for the financial criteria anyway.
- For funds, the knowledgeable employees qualify. You have to be an employee of a fund for this. Sure, you can do it, but only if your investment strategy is to run funds.
There are more, very obscure ones. You can read the entire law at Cornell Law School. Accredited investor-ship is often self-reported but most investments which require accredited investors will have some sort of verification. This is often a letter from your personal accountant or banker. It may be wise to have this pre-prepared and updated each year. Failure to have this verification done would mean that you are not allowed to invest in the deal.
Continue to watch for changes to the accredited investor requirements as they are reviewed every four years. Who knows, you might become an accredited investor without even trying!