What is an Accredited Investor? 8 Tests You Should Know
What is an accredited investor?
According to the Securities and Exchange Commission (SEC), only Accredited Investors can invest in unregistered investment vehicles. Such investment opportunities may arise in real estate syndications, tech startups, private equity funds, venture capital firms, hedge funds, etc. In the U.S, the definition of an Accredited Investor is put forth by the Securities and Exchange Commission in Rule 501 of Regulation D.
Any investor that does not meet the criteria is considered non-accredited, or sophisticated, according to the SEC. Exceptions exist, in which the sophisticated investor can participate. We detailed the exceptions in this previous blog. It is the responsibility of the security-issuing entity to verify and approve your accredited investor status.
To qualify as an Accredited Investor, you must qualify as ONE of the below criteria.
The Income Test
The Net Worth Test
The Inside Position Test
The Entity Test
The Certification Test
The Fund Employee Test
The Family Office Test
The Previous Investor Test
Let's check these out in detail.
The Income Test:
To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income with a spouse) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse.
The Net Worth Test:
A person is also considered an accredited investor if they have a net worth exceeding $1Million, either individually or jointly with their spouse, not including their primary residence. That bears repeating, the value of your primary residence does not count toward your net worth, and neither do the liabilities it carries.
The Inside Position Test:
The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.
The Entity Test:
An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.
However, an organization cannot be formed with the sole purpose of purchasing specific securities. If a person can demonstrate sufficient education or job experience showing their professional knowledge of unregistered securities, they too can qualify to be considered an accredited investor.
The Certification Test:
The SEC deems “natural persons” with specific certifications, licenses, and other credentials to be “financially sophisticated” enough to qualify as accredited investors. Accepted certifications from accredited educational institutions will initially include from The Financial Industry Regulatory Authority (FINRA):
Licensed General Securities Representative (Series 7)
Licensed Investment Adviser Representative (Series 65)
Licensed Private Securities Offerings Representative (Series 82)
The Fund Employee Test:
"Knowledgeable Employees" of venture capital or private equity funds would be permitted to invest in those particular funds without meeting the income or net worth tests typically required of accredited investors (as long as the fund identified as Accredited).
The Family Office Test:
“Knowledgeable Clients” of Family Offices.
The Previous Investor Test:
An Accredited investor verification for an investor who previously invested with an Issuer is now good for a period of up to 5 years so long as “the investor provides a written representation that the investor continues to qualify as an Accredited investor and the Issuer is not aware of information to the contrary.”
Fortunately, the SEC provides a lot of different options for someone to qualify. Do you qualify?
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