You may have heard the term accredited investor, but what exactly is an accredited investor? Who needs to be an accredited investor? Should you become an accredited investor? Here is what you need to know:
Who Is An Accredited Investor?
An accredited investor is a person or a legal entity (like a financial institution or a corporation) who is allowed to participate in investments not registered with the U.S. Securities and Exchange Commission.
They are allowed to deal, trade, and invest in financial securities as long as they satisfy at least ONE of the following requirements as defined by the SEC:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year
- Has a net worth over $1 million, either alone or together with a spousal equivalent (excluding the value of the person’s primary residence)
Other categories of accredited investors include the following:
- Any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person*
- Any entity owning $5 million in investments
- Any entity in which all of the equity owners are accredited investors
- Natural persons who are “knowledgeable employees” of the fund
- Any family office with at least $5 million in assets under management and their family clients
If you meet one or more of these thresholds, you are an accredited investor.
*In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
**The requirements above include the expanded definition of accredited investors adopted by the SEC in August 2020.
What Does It Mean To Be An Accredited Investor?
Under the federal securities laws, only those who are accredited investors may participate in certain securities offerings. One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and do not need the protections that come from a registered offering. Unlike offerings registered with the SEC, in which certain information is required to be disclosed, companies and private funds, such as a private equity fund, engaging in these exempt offerings do not have to make prescribed disclosures to accredited investors, saving time and money, leading to a greater potential for returns.
How Can I Become An Accredited Investor?
There is no formal registration or application to have an accredited investor status. Although the SEC defines what it means to be an accredited investor, there is no formal filing with the agency. Rather, it is up to each investing individual or entity to confirm their status. This is most commonly done by the interested investor filling out a brief questionnaire from a chosen investing company or fund to determine if the interested investor does in fact qualify as an accredited investor. The questionnaire may be as brief as a self-confirmation of net worth or it may need to be accompanied by information such as financial statements, balance sheets, or credit score.
As there is no formal application with an agency, it is often said investors are confirming they are an accredited investor rather than becoming an accredited investor when answering a company/fund’s qualifying questionnaire. As there is no central database of accredited investors, a qualifying questionnaire is required to be filled out with each unique company/fund.
Example Of An Accredited Investor
Let’s evaluate an individual who is interested in a private equity fund to see if they qualify. This individual has earned $170,000 of individual income for the last three years and reported a primary residence value of $900,000 with a mortgage of $300,000. They have a car worth $70,000 with an outstanding loan of $20,000, 401(k) account with $450,000 and a savings account with $500,000. While this individual fails the income test as they fall below the $200,000 threshold, they are an accredited investor according to the test on net worth. The person’s net worth is exactly $1 million, which is calculated as their assets of $1,020,000 ($70,000 + $450,000 + $500,000) minus a car loan of $20,000. The value of the primary residence is not included. Since they meet the net worth requirement, they qualify to be an accredited investor.
Where Does The Term “Accredited” Come From?
The term originates from the English word “accredited” which literally means someone who has been given special authority or sanction if they meet certain recognized standards. The qualifying criteria set by the SEC are designed to ensure that only the right candidate or entities take the high risk-high reward path.
What Investors Does CEP Invite Into Our Program?
You must be an accredited investor to invest in multifamily investment opportunities sponsored by CEP. Investors who Register to Receive Investment Opportunities from CEP must self-validate that they are accredited investors as part of the registration process. Once you register with CEP you will begin seeing investment opportunities from us. There is no obligation to invest. You maintain discretion and can choose which opportunities to invest in and the amount you will invest in each opportunity (subject to a minimum investment amount established by CEP).
Want More Details On The Accredited Investor Definition?
Check out the SEC guidelines for additional information.