You find the perfect investment opportunity, gather up the funds you need, and approach the investment firm, only to be rejected because of your status as a non-accredited investor. But because you’re determined to get a piece of the pie, you probe into why and you quickly learn that you don’t fit the bill to be an accredited investor because you don’t earn or have enough assets at your disposal.
But how much do you actually need to earn on an annual basis, is there a net worth requirement, and what are the steps you can take to become accredited? This comprehensive guide will provide insight into those questions and much more.
What Is An Accredited Investor?
According to Rule 501 of Regulation D of the Securities Act of 1933, an accredited investor is an individual that meets at least one of the following criteria:
- Has earned more than $200,000 in the last two years and plans to earn a similar amount of income in the current year; (this figure increases to $300,000 for those who are married)
- Has an individual or joint net worth over $1 million at the time the investment is made (The value of the investor’s primary residence must be excluded from the net worth calculation unless they have an outstanding balance on a home equity line of credit or their mortgage is underwater. In either of these scenarios, the value of the primary residence can be factored into the net worth calculation).
*Quick note: you must use the same method to calculate earnings or net worth for three consecutive years to qualify.
Contrary to popular belief, there’s no entity or agency that issues licensure or documentation certifying that an investor is accredited. It’s up to the investment firm to do their due diligence to confirm that investors fit the bill. More on that shortly.
Other Types of Accredited Investors
Per Rule 501 of Regulation D, banks, brokerage firms, employer-sponsored retirement plans, Registered Investment Advisor firms, and select trusts can also claim accredited investor status.
Key Benefits of Becoming an Accredited Investor
At this point, you may be wondering if it makes sense to become an accredited investor. Is it even worth the legwork or would you be better off maintaining your status as a non-accredited investor?
While you don’t have to become an accredited investor to begin earning a return on your money, doing so will open the door to more investment opportunities.
As a non-accredited investor, you can stash your cash into income-producing assets, like stocks, bonds, commodities, and mutual funds, in hopes of earning a generous return. But when you become an accredited investor, you gain a rite of passage to securities ripe with potential that the general public isn’t afforded the opportunity to invest in. These include equity crowdfunding, hedge funds, private equity deals, and venture capital funds, just to name a few.
Strategies to Reach Accredited Investor Status
As mentioned earlier, it’s not necessary to take a particular test or retrieve a certificate of licensure confirming that you’re an accredited investor. However, investment firms will do their due diligence, as mandated by the SEC to confirm that you meet the standards.
In most instances, you’ll be required to:
- Complete a detailed questionnaire about your finances
- Provide a copy of your financial statements, including your balance sheet, that includes your assets and liabilities
- Submit supporting documentation for any assets or liabilities disclosed in your financial statements
- Provide a copy of your W-2 forms, 1099 forms, tax returns, or any other documents that can substantiate your income (if you’re looking to qualify solely based on earnings)
Keep in mind that this list may not be exhaustive as some investment firms have additional screening requirements. And you may also be subject to a credit screening to help the firm gauge how you manage debt obligations.
Not quite qualified as an accredited investor? Below are some strategies to help you get there:
Tactic #1: Boost your earnings by changing careers.
It’s no secret: some careers are far more lucrative than others. So if you’re serious about earning more to become an accredited investor, it may be worthwhile to explore other career tracks and take the necessary steps to get you there. This could include enrolling in continuing education opportunities, pursuing another degree, attending networking events, or volunteering to get a better feel for the industry and meet people who can help you progress. .
Not sold on the idea of changing careers? Look for opportunities for advancement in your current industry. Speak to your supervisor to learn more about what you need to do to get a promotion, and ask around your company about job openings. A colleague may be able to assist you with upward mobility in the workplace. And if you keep hitting dead ends, it may be time to consider employment with another reputable company in the industry.
Tactic #2: Beef up your portfolio by purchasing more securities.
Shave expenses to free up disposable income, and use those funds to beef up your portfolio. Whether you decide to purchase more stocks, bonds, commodities, or mutual funds, be sure to diversify your holdings to minimize risk and maximize your earning potential.
Tactic #3: Invest in real estate.
Commercial buildings or rental properties are the way to go when looking to increase your net worth through real estate holdings. Not only will you give yourself the opportunity to increase earnings, but your net worth with also increase assuming you have equity in the properties.
But before you move forward, it may be a good idea to get a mentor that’s seasoned in the real estate game and will help you navigate any challenges you may face. Also, be sure to do your homework when scoping out lenders to ensure you’re getting the best possible interest rate on a loan to secure the property.
Tactic #4: Become an entrepreneur.
You don’t have to quit your day job to become an entrepreneur. Instead, consider launching a business in a highly profitable industry that you can run while remaining employed. Beyond investments and real estate, entrepreneurship is an ideal way to generate passive income, assuming you operate in a line of business that can generate income while you sleep.
Even better, you don’t necessarily have to empty out your accounts, take out a massive loan, or borrow money from family and friends to get started. You can start small and scale up by continuing to reinvest in your business as you earn more.
The Bottom Line
Becoming an accredited investor unlocks the door to a plethora of investment opportunities not afforded to everyday investors. But there are concrete net worth or earnings thresholds you must meet. Fortunately, with a little patience and diligence, there are strategies you can employ to help you meet those criteria and qualify as an accredited investor.