How To Determine If You’re an Accredited Investor

Being an accredited investor gives you access to investment opportunities that are not available to all retail investors. While the risk can be higher, so is the reward – aligning sophisticated investors with attractive investment opportunities. Many accredited investors will have investment opportunities in earlier stages of companies, and they can invest directly in those companies during concept research, development research, and early models and products. Privileged access is given to accredited investors if they meet certain financial criteria, and they can also participate in investments through private equity vehicles, hedge funds, and venture capital firms. This threshold was created to protect people without a financial cushion to fall back on, because of their high risk, often illiquid nature and potential for loss.

However, many people do not know if they are accredited and will too quickly assume they are not, when in fact they are. It is simply knowing the determining factors that qualify you as accredited or not.

What is an Accredited Investor?

An accredited investor is an individual with an accumulated net worth or earning capacity that allows or enables them to deal, trade, and invest in alternative assets. Most funds will only work with accredited investors as they are typically in a place of financial security where there is a reduced need for protection from risk. Accredited investors can be high net worth individuals, banks, insurance companies, brokers, trusts, or businesses.

What Qualifies Me as an Accredited Investor?

The requirements to being an accredited investor are guided and defined by the Securities and Exchange Commission.

Fortunately, there is no formal process for becoming an accredited investor, you simply must meet the following requirements:

1. To be an individual accredited investor you must either:
– Have an income exceeding $200,000 for the past two years with the same expectation for the next year.

OR

– Have a net worth exceeding $1 million, excluding the value of your primary residence.

2. To be a joint accredited investor with your spouse you must either:
– Have a joint income of $300,000 for the past two years with the same expectation for the next year

OR

– Have a joint net worth exceeding $1 million, excluding the value of your primary residence.

3. To be an accredited investor as a Trust you must:
– Have total assets in excess of $5 million
– Not have created the trust with the purpose of specific alternative investments
– Be directed by a person with financial and business understanding to evaluate merit and risk

4. To be an accredited investor as an entity:
– Each individual in the ownership must be an accredited investor

A New Accreditation Guideline

As of August 2020, the SEC has released new, non-wealth based standards of accreditation, in addition to expanding the list of entities that qualify. The new rules expand the definition to those with knowledge of the financial markets, such as licensed brokers or employees of financial institutions. Visit this blog post to learn more.

How Do I Calculate My Net Worth?

So, now you know what qualifies you as an accredited investor, you need to determine if you fit the requirements. As mentioned above, you need to have a net worth that exceeds $1 million as an individual or joint with your spouse to be considered accredited.

To find your net worth, add up all your assets and subtract all your liabilities. You may not include your primary residence in your net worth calculation. That also excludes your mortgage or loan on said primary residence from your net worth as well.

However, if the loan on your primary residence is more than the fair market value of the residence, then the loan amount that is over the fair market value counts as a liability in your net worth calculation. Additionally, if there is an increase in the loan amount on your primary residence within 60 days of investing, it will also count as liability.

If you’re looking to invest with your spouse, property does not need to be held jointly to count towards net worth.

When calculating your net worth, alternative investment groups may ask you for financial statements, tax returns, W2 forms or other documents that show income.

Who Regulates Accredited Investors?

While there is no government regulation of every individual accredited investor; there are strict regulations from the SEC requiring companies like private equity funds, hedge funds, venture capital firms, and others to take a number of steps to confirm the status of an investor before working with them.

What To Do next?

Now that you’ve determined if you’re accredited or not, you can decide whether you want to invest in alternative assets. At Excelsior Capital, we partner with accredited investors to own and operate cash flowing, income-oriented office properties. If you’re interested in learning more about our current offerings, please reach out to us below.