An accredited investor is someone who qualifies to invest, deal, and trade in financial securities and has a special status under financial regulation laws. The SEC has determined that there are two main criteria that can be used by an individual to become an accredited investor.
First, someone who has earned income of more than $200,000 or a joint income with a spouse of more than $300,000 over the past two years can qualify as an accredited investor. However, this qualification can only be provided if the individual expects to earn a similar income over the next year. Individuals can also be accredited investors if their individual net worth or their joint net worth is over $1 million when the investment takes place.
Avenues to Verification
Additional methods of verifying that you’re an accredited investor are also available if you don’t qualify for the net worth or high-income methods. When you are deemed to be an accredited investor, you can invest your money into non-registered investments that are provided by venture capital firms, private equity funds, and hedge funds. If you want to invest in the previously mentioned funds, the following article provides a guide on how to become a verified accredited investor.
Are You An Insider?
An individual can be an accredited investor if they are a director, general partner, or executive officer of the issuer of the securities that are being sold or offered. While the majority of accredited investors receive this designation because of their income level or net worth, people who are directly tied to the unregistered security can also receive this designation. An unregistered security is any kind of stock, bond, or note that has yet to be registered with the SEC to be sold to the public. Being an accredited investor means that you can purchase these securities before they have been made available to the public.
Evidence Required to Prove Insider Standing
When you attempt to purchase an unregistered security from a hedge fund or private equity fund as an insider, you will be required to provide evidence that you are a director, general partner, or executive officer of the security in question. This evidence can be in the form of resolutions, incumbency, governing documents, or similar certificates. Anything that can prove that you are in an insider position may be accepted as evidence to prove insider standing.
There are times when this evidence could be publicly available via research reports, securities filings, or other kinds of information that are available through third-party sources. While only a small selection of individuals will qualify to be accredited investors through this method, it’s considered to be the easiest way to get verified.
Obtain a Professional Letter
You can also become an accredited investor by providing a professional letter as proof, which must be provided to you only by qualified individuals. These individuals include:
- A registered broker-dealer
- A licensed attorney who is currently in good standing
- An investment adviser who is registered with the SEC
- A certified public accountant who is currently registered and is in good standing
What Does This Professional Letter Have to Say?
The professional letter that’s provided to you should state that logical steps were taken to determine that you are an accredited investor within the previous three months and that you were found to be an accredited investor. If you have a lawyer or accountant by your side who is able to provide this statement, you would be able to go through the verification process without needing to spend a significant sum of money. However, you may need to pay a small fee to obtain a professional letter.
It is also possible that the lawyer or accountant you work with won’t feel comfortable with providing this letter. One reason may be that these individuals have qualms about issuing a professional letter due to liability concerns. If this is the case, you may need to focus on becoming a verified accredited investor by showing evidence of high income or high net worth.
Does Your Yearly Income Qualify?
Likely the most common way to become a verified accredited investor is by having a certain income level. You can be deemed an accredited investor if you have earned income that exceeds $200,000 for both of the last two years.
The same is true if you have earned joint income with your spouse which is more than $300,000 for the past two years. However, the income level verification can sometimes be difficult to obtain because you will be required to prove that you have a reasonable expectation of earning the same level of income in the current year. If you are unsure of the security of your employment in the future, it might be better to attempt to become a verified accredited investor via your total net worth.
It’s important to note that your income will need to be obtained in the same way for both years. You won’t be verified if you earn more than $200,000 as an individual for one year but make over $300,000 as joint income for the next year. Let’s say that you make $250,000 for the first year while your spouse makes next to nothing. This indicates that you would eventually become an accredited investor by displaying over $200,000 with individual income. If the second year has you making $150,000 while your spouse makes $200,000, you wouldn’t qualify as an individual but would instead only be above the joint income threshold of $300,000.
Even though you make more than $200,000 in both years, the money needs to be earned the same way both years in order for you to become verified. An exception to this rule is allowed if you get married or divorced during the two-year period but still meet the $200,000 or $300,000 threshold.
Evidence Required for Proof of Income
The easiest way to provide evidence that’s required for proof of income is to provide official or government records that display your income, which could be your regular pay stubs or your yearly tax filings. If you are unable to provide this documentation, it’s also possible to obtain a letter from your employer or accountant who confirms that your wages or annual income are higher than $200,000 or $300,000 with a joint income. If you need to request this letter, make sure that your employer or accountant also provides evidence that you will be able to maintain this income for the current year. Along with this letter, you must make a statement that you believe your income level will be above the threshold for the current year.
Are You Considered a High Net Worth Individual?
You can become an accredited investor by proving that you have a high net worth, which means that your individual net worth or joint net worth with your spouse will need to be above $1 million. The main issue with making this calculation is that the positive value for your main residence isn’t directly counted when your total assets are being calculated. While the value of your home isn’t counted, any debt that was incurred over the past 60 days with your main residence will be subtracted from the value of your total assets. This method can be very simple to calculate if you happen to have zero liabilities and practically all of your assets within a single bank account. Otherwise, you’ll want to weigh the pros and cons of each option.
Evidence Required to Prove High Net Worth
While it might seem like proving high net worth would be the easiest verification method for becoming an accredited investor, it’s important to understand that you will be required to disclose both your assets and your liabilities so that the net worth can be calculated. It’s not enough to have more than $1 million in assets. It’s also important that the number of liabilities you currently have don’t lower your total worth to below $1 million.
There are three separate factors that are used when verifying that you have a net worth of more than $1 million. The first factor involves the credit report for yourself and your spouse, the latter of which is only necessary if you’re attempting to qualify for the high net worth verification through joint net worth with your spouse. If a U.S. credit report can be accessed, it should be provided. If you don’t have a credit report tied to your name, you will be required to explain why there isn’t a credit report, which can make verification difficult.
The next step in proving your net worth is disclosing all of your liabilities. If you have any liabilities, they will be deducted from your net worth. If you believe that there aren’t any liabilities tied to your name, you must make an affirmative statement that you don’t have liabilities. The final step involves disclosing all of your assets. When you disclose your assets, you will need to support them with documentation that shows you are the rightful owner of the asset. The asset’s value should also be calculated.
Different assets have different guidelines when you’re attempting to calculate your net worth. For instance, any insurance policies or annuities that you have could have a cash value to them, which means that they could be used as assets. For any bank accounts or certificates of deposit, you should provide your latest statement that displays the value of the account. If you gather the right documentation, you should be able to use nearly all of your assets as proof that you are a high net worth individual.
Diversifying Your Investment Portfolio As an Accredited Investor
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*Disclaimer: The statements and opinions expressed in this article are solely those of AB Capital. AB Capital makes no representations, warranties or guaranties as to the accuracy or completeness of any information contained in this article. AB Capital is licensed by the Financial Division of the California Department of Business Oversight as a California finance lender and broker (DBO Lic. No. 60DBO-69427). AB Capital makes money from providing bridge loans. Nothing stated in this article should be interpreted, construed or used as legal, financial, investment or tax planning advice, or a substitute for thorough due diligence and the exercise of sound independent judgment. If you are considering obtaining a bridge loan, it is recommended that you consult with persons that you trust including but not limited to real estate brokers, attorneys, accountants or financial advisors.