What is an Accredited Investor? Can you be one?
Written By Ethan King
Do you ever watch Shark Tank, love a company, and wonder, “Can I be an investor?” We have all heard of private companies turning public with massive returns for early investors. Think Amazon, Apple, and Uber. However, many times, these companies do not become the next big thing, and that is why there are regulations in place to prevent people from taking uneducated risks and losing everything. Therefore, to invest in early-stage opportunities, you must be an “accredited investor.”
What Is an accredited investor?
An accredited investor is someone who has enough income, net worth, or financial knowledge that the government deems them responsible enough to risk investing in private companies, without needing additional protection.
According to the U.S. Securities and Exchange Commission (SEC), you, as an individual, will qualify as an accredited investor if you meet any of these conditions:
Income Test: You earn $200,000 a year individually, or $300,000 jointly with a spouse or partner, and you have earned this income in the past two years, and there is an expectation to continue earning at this level.
Net Worth Test: You have a net worth over $1 million, either alone or with your spouse, excluding the value of your primary residence.
Professional Certifications: You hold certain financial licenses like Series 7, 65, or 82.
***Entities: Trusts or companies with over $5 million in assets can also qualify, under certain conditions.
Why the guardrails?
Private companies do not need to follow the same disclosure rules as public companies. Thus, investing in private companies carries more risk (as you may not have adequate data available to you). However, they can result in a potentially substantial award. To shield people from betting and losing everything if it went wrong, the accredited investor rule was created. The intention of the rule is to only allow those who can withstand such a loss to take these chances.
What do accredited investors invest in?
Everyone can invest in publicly traded companies. Accredited investors, however, can take part in:
Angel Investing: Buy shares in early-stage startups before they go public.
Venture Capital Funds: Pool money with others in a professionally managed private fund.
Real Estate Syndications: Get involved in large real estate deals typically unavailable to everyday investors.
Hedge Funds and Private Equity: Explore high-risk, high-return investment strategies run by professional managers.
What if you qualify?
If you qualify and want to pursue becoming an accredited investor, make sure you have all your documents to prove it. Private funds and companies will require you to give these disclosures so that they can properly vet and ensure you meet the proper criteria. Then, you want to make sure you believe in the fund or company and that it is a good fit for you. While you can go it alone, most people will reach out to an advisor, a mentor who has completed similar transactions, and an attorney to help you understand, negotiate, and execute your investment documents.
Can you Invest in a private company as a non-Accredited Investor?
The simple answer, yes. But it becomes much more complicated. Private companies that are offering equity to non-accredited investors must consider whether it is worth the effort. Here are a few things to keep in mind:
The company needs to file disclosure documents, raising over $10 million during a 12-month period requires higher level SEC disclosure.
The company must still follow all state securities laws for every state in which an investor resides.
The company can also consider equity crowd funding for raises of less than $5 million during a 12-month period. This type of funding also requires company disclosures of financial information and risk factors, plus it requires additional filings when certain thresholds of the targeted capital goal is met.
Bottom Line:
While being an accredited investor opens more financial investment opportunities, it does not come without risk. The rules are in place to ensure that a person has enough of a financial safety cushion, or a high level of financial knowledge before making an investment in a private company.
It is easier for private companies to work with accredited investors, vs. jump through hoops to make it work for non-accredited investors.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
