There has never been a better time to be an accredited investor. Are you accredited?
It sounds like a fancy designation, but if you earn more than $200,000 annually there’s a good chance you are already an accredited investor.
New technology and updated securities laws have opened doors to a variety of once-exclusive investment opportunities. The 2012 JOBS Act cleared the way for crowdfunding platforms to level the playing field for accredited investors across the U.S.
There are more than 9 million accredited investors in the U.S. However, fewer than 10 percent are believed to be active investors. More than 8 million investors are missing out. Why?
Many investors don’t even know they are accredited. Here’s a simple overview to help explain the basics of becoming an accredited investor.
What are the criteria for being an accredited investor?
It’s a simple test:
- Does your individual annual income exceed $200,000 in each of the two prior years?
- If married, does your combined income exceed $300,000 in each of the past two years
- Do you have a net worth exceeding $1 million (excluding primary residence)?If you answered “yes” to any of the above, you are accredited.
What’s the advantage to being an accredited investor?
Accredited investors are able to view and invest in offerings not listed on public securities exchanges, including private real estate deals, startup funds and more. Plus, the advent of crowdfunding allows sponsors to take their offerings to all 3 million accredited investors in the U.S. via the Internet. Previously, they were limited to friends, family and business contacts.
CAN AN ENTITY BE CONSIDERED AN ACCREDITED INVESTOR?
Yes. The SEC considers banks, corporations, nonprofits and trusts that meet certain criteria to be accredited investors. An institution is accredited if all of its partners are accredited as individuals. Also, such entities are considered accredited if they have more than $5 million in diverse assets, managed by a sophisticated investor.
WHY IS ACCREDITATION REQUIRED?
It’s a consumer protection. Federal securities law requires accreditation to protect lower-income investors from getting over their head in more risky or sophisticated investments. Private investment offerings are considered exempt from many rules that govern public stock and debt offerings. It is expected that accredited investors are capable of weighing risks and inspecting necessary disclosures and documents before investing.
HOW DO I VERIFY MY STATUS AS AN ACCREDITED INVESTOR?
Investing platforms can verify accredited investor status with a letter from a third party, such as a personal accountant or attorney, that confirms he or she meets the criteria. Most crowdfunding platforms, angel investing groups and other investing networks allow investors to self-verify on the honor system to view or hear investment opportunities. However, the investor will be required to submit documentation proving he or she meets all requirements before formally investing.
How does the JOBS Act change the environment for accredited investors?
The JOBS (Jumpstart Our Business Startups Act) cleared the way for general solicitation of exempt investment offerings. This means sponsors can now advertise private offerings online and in other media. This means two things for accredited investors:
Investment opportunities are now much more accessible. From crowdfunding websites to angel investing networks, investment offerings can be publicly shared and advertised. Accredited investors have more options at their fingertips.
Due diligence and education is extremely important. Exempt offerings are not subject to as many rules as other public investment offerings. Investors need to be choosy about working with crowdfunding sites that offer solid underwriting. All terms and disclosures should be inspected carefully. Understand exempt investment securities, no matter what returns are estimated, can lose value and may not be as easily sold as public stock.
THE JOBS ACT
All in all, the JOBS Act has created a more level-playing field for all accredited investors. Yes, investing carries risks and investors need to proceed with caution. But the opportunity to invest in private offerings once reserved for the most elite is now open to millions of accredited investors.