When an individual wants to become an accredited investor, there are certain rules and laws that have to be followed. The criteria are set by the Securities and Exchange Commission in Rule 501 under the Securities Act of 1933 (Reg. D). Many people want to become an accredited investor because it opens a lot of doors for individuals to grow their money through investing in private equity, venture capital, hedge funds, private placements, and equity crowdfunding offerings. Not everyone has a strong understanding of who or what an accredited investor is or what is required to become one, though. So let’s take a closer look at what it all means:
Who is an accredited investor?
Accredited investors are people who fall into a category determined by the Securities and Exchange Commission based on income and net worth. They have been determined to know, and be capable of taking on the risks and tasks of investing in an unregistered security. There are no licensing requirements and no official certification for the accredited investor category.
How can someone be determined an accredited investor?
There are a few requirements and specifications that can deem someone an accredited investor that fall within the SEC’s guidelines.
1. The SEC can determine if a person is an accredited investor by his or her income. This means the investor alone has to have at least earned an income that is no less than $200,000 in each of the two most recent years or $300,000 when combined with a spouse. He or she should have a reasonable expectation of the same income level in the current year.
2. Combined net worth with a spouse can also be a factor.
· If the person fails to meet the above income level, an individual's net worth, or joint net worth with the person’s spouse must be greater than one million dollars at the time of the purchase or investment.
· The value of the primary residence does not count towards net worth.
· Income may not be split to meet these requirements unless the individual was married during the year.
· If an individual used his income for the first two years, he can’t use a combined income for the next year unless the couple was married within that year.
So what do I actually need to do to become accredited?
You either are or you are not wealthy enough to meet the guidelines. There is no test however, not certification. There is no part of the SEC or any government agency that an individual applies to and waits for approval. The word “accredited” can be misleading because there is no one who “accredits” you, other than you and the company you hope to invest in.
In practice, a company will provide a questionnaire asking potential investors to provide information that shows that he or she meets the required criteria. An individual may be required to submit W-2 forms or tax returns or other documents. This is often not required.
While it is clear in some situations that an individual meets the criteria, in other cases is it not. It makes sense to walk through the requirements step by step to make sure the individual has a strong understanding of the representations made in an investing agreement.
Those who are looking for an investor may fail to understand that while he or she might require someone to invest in their startup, he or she also needs someone who can offer the startup company the financial resources necessary to get started. Likewise, investors have a lot to lose if they don’t invest wisely, so it is important that the startup finds someone who knows what they’re doing and has the financial resources to invest.
An IRA is an alternative option to consider and can be used for accredited investments as long as the participant is an accredited investor.
If you qualify as an accredited investor, and find a party offering securities, you are now able to invest.
Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves and eASIC.
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