Nearly anyone can be an accredited investor -- and the benefits of having one can be lucrative.
The Securities Act of 1933 established accredited investors. It requires companies selling securities to register accredited investors with the Securities and Exchange Commission or qualify for an exemption under existing registration requirements. Accredited investors qualify for several exemptions to securities law. As such, companies like to sell their securities to these investors to qualify for exemptions.
What Is an Accredited Investor?
According to the Securities and Exchange Commission, eight different groups can fall under the heading of “accredited investor:”
- Trusts with assets totally in excess of $5 million that have not been formed for the purpose of acquiring the specific securities offered.
- Banks, registered investment companies, insurance companies, business development companies or small business investment firms.
- An individual with an income greater than $200,000 for the two most recent years or a joint income with a husband or wife greater than $300,000 for the same years. The person must also reasonably expect to have the same or greater income level for the current year.
- Qualified employee benefit plans under the Employee Retirement Income Security Act. A bank, insurance company or investment adviser must be in charge of the investment decisions, or else the plan must have total assets exceeding $5 million.
- Individuals with an individual net worth or combined net worth with a spouse in excess of $1 million at the time the purchase is made.
- Charitable organizations with assets greater than $5 million.
- Businesses in which all equity owners are current accredited investors meeting the guidelines for individual accredited investors.
- Directors, executive officers and partners of the company whose securities are for sale.
The latter is perhaps the easiest way to qualify as an accredited investor. Literally anyone can be made a potential accredited investor by giving them a spot on the board, an executive position or making them a partner.
Why Find an Accredited Investor?
Accredited investors can be very attractive to a company for the fact that they are not beholden to most Security and Exchange Commission rules. Accredited investors can invest in high-risk investments often off limits to other investors. Such investments include:
- Seed money
- Angel investments
- Limited partnerships
- Hedge funds
In January of 2011, the SEC submitted amendments to the current guidelines for accredited investors. The proposed amendments would change the requirements for counting an individual’s net worth to not include the value of the primary residence. The changes to the guidelines have not yet been adopted at press time.
Getting an Accredited Investor
As stated above, making someone an accredited investor is as easy as promoting them. Barring that, there are a number of accredited investors who exist publicly and are ready and willing to invest. Perhaps the most well known of accredited investors are angel investors, who are frequently spoken of by those seeking start-up capital for their business. If you are looking for accredited investors outside of the firm, you won’t have to look far.