What's an Accredited Investor? (& Why You Should Want to Be One)

Being an accredited investor can mean a lot of different things both in the legal sense and in the financial opportunities available to you. Before diving fully into what legally defines an accredited investor, let’s begin quickly with a tangible, real world example of the superpowers an accredited investor has.

What Accredited Investors Can Do That Non-Accredited Investors Cannot

Let’s say a real estate investor like myself wanted to raise money from a bunch of people for a real estate deal (something I’m actually doing right now), they are what’s called a “syndicator” and the deal is called a “syndication.” But when you start raising money, at least here in the U.S., the government gets pretty involved. They don’t want you losing poor Grandma’s savings—so the government requires syndicators to follow certain rules when raising money.

Now, there are a couple options for syndicators, and the specific way you set up your syndication or fund will determine what kinds of investors you can bring in. For example, I just opened up what’s called a “506(c) fund,” which means I can talk publicly about my real estate fund like I’m doing right now. However, I literally cannot accept any money from non-accredited investors—not even from my own mom.

See what I mean by “superpowers”? As an accredited investor, you can get into some pretty awesome deals that the rest of the population can’t.

Now, if you’re not accredited, don’t fret. There are other ways for syndicators to raise money, like a 506(b), which allows for up to 35 non-accredited investors to join the syndication—as long as they are “sophisticated” and they have some kind of personal relationship with the syndicator.

What does “sophisticated” mean? Well, an investor is basically considered sophisticated if they know their way around a real estate deal. [1] But it’s realistically something that is kind of subjective. And because it’s the government, there are other avenues, as well. But for now, I hope this provides a clear example of the perks that accredited investors are entitled to.

Special Offerings to Which an Accredited Investor Has Access

Besides just sounding impressive, “accredited” investors find themselves in a financial class above the average investor. While the average investor only has access to opportunities limited within regulated public markets, accredited investors are eligible to invest in private offerings like syndications or early-stage business startups with the potential for both huge risk and huge reward.

Since these small private offerings are not regulated by the SEC (Securities and Exchange Commission), the investor assumes total responsibility and a higher potential for losing their total investment. With this risk, though, comes potential for astronomical financial gain if the business succeeds. They will be one of the first people in the door and will have all the perks that come with it.

Now that I’ve piqued your interest, let’s talk about what it takes to be an accredited investor.

Who Is an Accredited Investor?

Good question! Because even if you are one, nobody would have told you. Although this designation of “Accredited Investor” carries huge implications for your financial life and the opportunities you can participate in, there is no formal process, exam, or document that says whether or not you are accredited. (Boo, nothing to hang on your wall.)

Accredited investors are considered to be such only if they meet certain legal definitions spelled out by the SEC. [2] It is the duty of the businesses accepting investors, or selling the shares in exchange for capital, to confirm that their investing partners meet the legal requirements.

Although there are regulations that dictate how an organization or corporation can be considered an accredited investor, for our purposes, we will focus specifically on how individuals and couples become accredited. The SEC deems an individual or married couple to be accredited if they meet ONE of the following criteria:

Has had a minimum annual income for the past two years of $200,000 for an individual or a combined income of $300,000 for married couples. These annual incomes must also be reasonably expected to continue in the future.
Has either an individual or a combined net worth of at least$1 million. This total cannot include your primary residence.

The reason the SEC has these rules listed in Regulation D goes back to the very purpose of the SEC’s creation, which was to protect investors. The above requirements are to ensure that anyone assuming these substantial risks has the financial backing to weather and withstand the worst case scenarios. This is the governmental equivalent of saying, “You’re a big boy now. Figure it out.”

The kid gloves are coming off!

Related: How to Become an Accredited Investor

So you’re deemed to be an accredited investor. You are now held responsible to make your own informed and calculated decisions. I know that just because you are labeled “accredited” doesn’t mean that you will necessarily feel any more proficient than before. But it is now more important than ever to educate yourself and thoroughly analyze every deal you participate in. Proficiency will come only through education and experience.

Diligently do your due diligence. You now have entry into the world of real estate syndication, venture capital, angel investing, and other opportunities that are not accessible to the average investor. Make sure to not take this responsibility lightly. It’s quite something that you’ve made it far enough to earn the title. Take a moment to be thankful for where you are. Now go make the most of it!

Sources:

[1] https://www.investopedia.com/terms/s/sophisticatedinvestor.asp

[2] https://www.investopedia.com/terms/a/accreditedinvestor.asp

Do you have any other questions for me about this designation and/or its benefits?

Ask me in a comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.