Why Is Knowing Your Investor Accreditation Status Important?
So, you've decided you want to start investing, take control of your financial future and plant seeds of equity with your own hands? Imagine, you’ve saved up your seed capital, found a fruitful investment opportunity and are ready to plant your money tree. Congratulations! You’ve taken the first step into a world of opportunities but unfortunately some of it may be off limits. Before you can start salivating over the profits you will harvest -wait! You must first verify if you’re qualified for that particular investment opportunity. In order to do this, you must know your accreditation status.
What Is an Investor Accreditation Status?
Accreditation status is an investor designation set forth by the SEC. The SEC? Who are they? Simply put, the SEC, Securities and Exchange Commission, is a federal body tasked with regulating the investing world in order to protect investors. They help to prevent the common investor from being taken advantage of by unscrupulous operators or phony investments. Anyone offering an investment opportunity is mandated to register the opportunity, referred to as a security, with the SEC or file an exemption from registration. How the security is registered, or the exemption is filed determines what status of investors may participate in the investment.
What Are They Types Of Investor Accreditation Status?
In the eyes of the SEC you are either Accredited or Non-Accredited. Furthermore, you are only legally allowed to invest in securities that align with your accreditation status.
What Is The Definition and Who Qualifies As An Accredited Investor?
An Accredited investor is someone that meets the following criteria:
Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
Net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Any entity in which all the equity owners are accredited investors.
Any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person.
Everyone else would be a non-accredited investor. These designations are largely based on the finances of the investor(s). Because of this, knowing how to calculate your net worth is helpful in determining your accreditation status.
What Are The Benefits Of Being An Accredited Investor?
There are more investment opportunities available exclusively to accredited investors than non-accredited investors. At first this may seem unfair to investors who have not yet achieved this level of income as it prevents them from taking advantage of potentially profitable opportunities. However, the logic is that accredited investors have more capital to invest and would recover more easily from a failed investment than non-accredited investors. Thanks to [new regulation] in the last decade there are now more opportunities for non-accredited investors.
What Are The Limitations For Investments With Non-Accredited Investors?
Investments involving non-accredited investors have additional regulations limiting either the amount of non-accredited investors that can be involved or the amount of money that can be raised for the investment opportunity. The most common one you may encounter as a non-accredited investor is the exemption to registration under Securities Code Regulation D, Rule 506(b).
Rule 506(b) allows up to 35 non-accredited investors to invest alongside an unlimited number of accredited investors. These non-accredited investors, however, must be sophisticated investors. Meaning, they must have “Sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.” These offerings are privately traded making them less liquid and harder to find than stocks that are publicly traded. Furthermore, all investors involved must have a pre-existing relationship with the sponsor or operator offering the investment opportunity prior to the opportunity being made available. Participating accredited investors must also identify and self-certify themselves as such. This removes the sometime tedious extra step involved with a common exemption exclusive to accredited investors, Rule 506(c), that requires third party verification of accreditation status.
In Summary, your accreditation status is a designation based on your current finances that determines which investment opportunities you may participate in. Its information you need to know so you can confidently plant your seeds of equity in the right soil of opportunity.
If you are unsure what your accreditation status is or would be interested in finding out what opportunities you qualify for with your current accreditation status please feel free to contact us at the contact page.