What Does It Mean To Be An Accredited Investor?

Many investors aspire to one day become an accredited investor, as the mere addition of the word “accredited” to their title suggests an incredible sense of accomplishment. An accredited investor is, after all, an investor that has demonstrated the ability to realize success in their field. While not everyone may currently be an accredited investor, it is quite possible to work your way towards becoming one. With a mind for due diligence and a sound business strategy, real estate may be your key to finally becoming an accredited investor.

What Is An Accredited Investor?

The term “accredited investor” refers to a person or business that has been given permission by the Securities and Exchange Commission (SEC) to deal in securities that may not be registered with financial authorities. In order to be granted access to deal in unregistered securities, however, accredited investors must satisfy at least one of several requirements outlined by the SEC under Regulation D. More specifically, accredited investors need to meet minimums regarding income, net worth, asset size, governance status or professional experience.

The sole purpose of declaring an individual or business entity as an accredited investor is to identify those that are financially savvy and who have already demonstrated an increased propensity for mitigating the economic risk of investing in unregistered securities. The concept of an accredited investor is to identify those who are more capable of dealing in risky unregistered securities.

Since accredited investors are typically at risk of losing an entire investment, they must prove to the proper authorities they are capable of weathering any sort of “storm” that comes their way. That said, accredited investors can come in the form of anything from banks, insurance companies, brokers and trusts to high net worth individuals (HNWI).

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Accredited Investor Requirements

Accredited investor requirements vary from jurisdiction to jurisdiction, and are often the product of a competent local market regulator. However, the SEC has put forth very specific requirements for accredited investors in the United States. According to Rule 501 of Regulation D, an individual must meet one of the following requirements to be considered an accredited investor:

• The individual must have earned more than $200,000 (or $300,000 with a spouse) in each of the last two years. Not only that, but the same person must reasonably expect to make roughly the same amount in the current year.
• The individual must have a combined net worth of at least $1 million, either alone or together with their spouse (not including the value of their primary residence).

According to Rule 501 of Regulation D, a business entity must meet one of the following requirements to be considered an accredited investor:

• The business entity must have more than $5 million in assets.
• If the business entity is made up of equity owners who are, themselves, accredited investors, the business is then considered to be an accredited investor. However, a business entity may not be built for the sole purpose of buying unregistered securities.

Qualified Investor Vs Accredited Investor

More often than not, people incorrectly assume qualified investors (also known as qualified purchasers) are the same as accredited investors. However, while the two terms sound interchangeable, they have several differences that warrant your consideration.

Most notably, the financial thresholds each investor must meet are incredibly different. Whereas an accredited investor either needs to be worth more than $1 million or have an earned income in excess of $200,000 a year, qualified investors must exercise a net worth of more than $5 million. In other words, qualified investors are essentially more qualified to purchase unregistered securities than even accredited investors.

How To Become An Accredited Investor

There isn’t a universal process for becoming an accredited investor, nor is there a single path an interested party must adhere to. What’s more, there’s no need to register, fill out a form, or even apply for a certificate. Instead, it’s the sole responsibility of the sellers of unregistered securities to verify that the investor they intend to work with is—in fact—accredited.

Therefore, to become an accredited investor, one must not only be able to meet the previously discussed requirements, but also prove that they have done so. If for nothing else, the sellers of unregistered securities are going to want proof that they are dealing with accredited investors. As a result, it is recommended to be prepared to answer a questionnaire.

“The questionnaire may need to be accompanied by various attachments, like account information, financial statements, and balance sheet to verify the qualification. The list of attachments can extend to tax returns, W-2 forms, salary slips, and even letters from reviews by CPAs, tax attorneys, investment brokers or advisors. Additionally, the issuers may also evaluate an individual’s credit report for additional assessment,” says Shobhit Seth in a November 2018 article.

Using Real Estate Investing To Become An Accredited Investor

If you have yet to meet the requirements of the accredited investor definition, you may want to consider using real estate to make your way towards becoming a high net worth individual. Real estate is, after all, a primary component of today’s most wealthy individuals, and for good reason. A strong real estate portfolio is capable of generating attractive returns though a variety of exit strategies: Rehabbing, wholesaling and rental properties.

Rehabbing, in particular, has served investors well in recent history. In the second quarter of this year, “Homes flipped in Q2 2018 sold for an average of $65,520 more than what the home flipper purchased them for,” according to Attom Data Solutions’ latest Home Flipping Report. At that rate, the average investor flipping homes in the U.S. is yielding an average gross return on investment of 44.3 percent. Few, if any, investment vehicles are capable of matching the returns today’s investors are seeing, and it’s not hard to see why real estate may be one of the best paths to becoming an accredited investor.

Summary

The term accredited is often used to refer to someone that is officially recognized or authorized. When placed in front of the word “investor,” however, the adjective acts as a title; one that highlights the continued success of a respective investor. After all, an accredited investor is something almost every investor in the field of real estate aspires to become. That said, if you hope to become an accredited investor one day, real estate may be the vehicle that gets you there.

Key Takeaways

• Accredited investor requirements vary from jurisdiction to jurisdiction, but the concept is the same: high net worth individuals get accredited more often than not.
• The idea of an accredited investor is to identify those that are prepared to take on projects with significant risk.
• Accredited investors must have earned more than $200,000 (or $300,000 with a spouse) in each of the last two years and expect to make roughly the same amount in the current year.