How to qualify as an Accredited Investor?
Definition of Accredited Investors
In the United States, according to the Securities Exchange Commission (SEC), to be qualified as an accredited investors, people need to meet at least one of the following criteria
Individual income >=$200,000 per year for the past two years and expect to maintain
Joint income (married couple)>=$300,000 per year for the past two years and expect to maintain
Have a net worth of more than $1 million excluding your primary residence
Being a general partner, executive officer, director, or a related combination thereof for the issuers of a security being offered
For accredited investor definition in other nations, please refer here for more details.
how to qualify as an Accredited Investor
Verification Process
Obtain a letter from your CPA or attorney that attests and confirms your accreditation status
Upload documents to online third parties such as Verifyinvestor.com and InvestReady.com
Tax returns and Income upload (w2, 1040, or 1099)
Bank or brokerage statements
Real Estate Appraisal
IRS Social Security Number (takes the longest, as it relies on IRS feedback which can take 4-5 business days)
Benefits of being an Accredited Investor
New opportunities. Be able to invest in many alternative investment class like hedge funds, venture capital, private equity, commercial real estate, cryptofunds, and hard money loans.
Potential high-returns. certain value-add and development deals can return a 15%-25% IRR. However investors may take on addition risk and illiquidity.
Diversification. Stock market is relatively volatile so accredited investors who see to diversify their portfolio could invest in assets that are less correlated or uncorrelated to the market. Commercial real estate, for example, do not rise and fall lockstep with stocks and bonds. They can be an effective hedge. However they are sensitive to the boarder economic cycle and local market conditions.
Downsides of investing in private placements
High risk. Most of the risk factors will be specified in your private placement memo. As an investor, you need to know that investing in those assets, you may lose most or all your capital.
Illiquidity. Private investments are usually long term holds. For instance, commercial equity real estate deals are 3-7 years hold with no secondary market to sell the shares. However because of this, accredited investors could expect a liquidity premium in their returns.
Due diligence. Most of those private offerings to AIs are not regulated by the SEC. There are good and bad apples (sponsor and deals). It is up to the investor to do their own due diligence. Some of the real estate crowdfunding sites help do the initial due diligence and the level varies from site to site. The final decision and analysis lie with the investors. Here is an example of how people do due diligence analysis.
High minimum. Private offering minimum sometimes is as high as $250,000. With the advent of online crowdfunding, minimums have come down to as long as $1,000. However, higher quality sponsors usually require higher minimum amounts in the rang of $10,000 to $100,000
High fees. Some private offerings could charge a high fee. Some private REITs may charge you 15% of investment capital before you make any money. Some sponsors may also construct a waterfall distribution which maximize their returns by taking a large piece of your pie.
Tax Filing. Private offerings will issue either a K-1 for equity deals, or a 1099 for debt deals. These may complicate tax filing, especially if investments are in a self-directed IRA or 401k. In those cases, there may be unrelated business income tax (UBIT) or unrelated debt-financed income (UDFI) that investors must pay. If profits are above a certain threshold, the investor must file a form 990-T. Also the K-1 forms from sponsors often come in after April 15, so the investor must file for an extension for their tax returns.
You don’t have to be an accredited investor to be successful in investing
Even though there are many benefits for being an accredited investor, it does not mean non-accredited investors could not be more successful in investing. It also did not guarantee an accredited investors is more capable and sophisticated in investing.
There is a serious problem with SEC’s definition of an accredited investor. According to SEC, being accredited implies that an investor has sufficient fund and is sophisticated to invest. The first part of the definition is straightforward that only wealthy individuals qualify as an AI. However having a million-dollar net worth or a huge income does not make someone sophisticated and therefore make investments without the consumer protection offered to the less wealthy. Here are some examples for your reference.
Mega-ball lottery winner Oct 2018 possess a net worth of billions of dollars. There is no indication that she has sufficient investing knowledge
A doctor or a Google software engineering, they can be super smart and hardworking in their field, making a great income yearly. However it does not mean they are all financial savvy
Warren Buffett - Who build most of his wealth through stock investing, which non-accredited could do as well. He did not rely on those asset classes that only AI can invest.
