Patrick Iturra, Asset/Investment Manager & Consulting May 19, 2023
Accredited investors play a pivotal role in the financial ecosystem, particularly when raising capital for enterprises. Federal securities laws govern the definition of an accredited investor, and it determines who can potentially invest in many early-stage companies. These laws also limit participation or enforce restrictions on non-accredited investors in many offerings.
The accredited investor’s role is paramount as they often possess the financial wherewithal and experience to evaluate and undertake higher-risk investments. Moreover, they are vital in the funding cycle for start-ups and other companies seeking capital outside traditional financing sources.
How Can Individuals Qualify as Accredited Investors?
Individuals can qualify as accredited investors by meeting specific financial or professional criteria.
Financial thresholds serve as one method to ascertain the individual’s ability to sustain the potential risk of such investments. To qualify financially, an individual should have:
- A net worth exceeding $1 million, excluding the value of their primary residence, either individually or jointly with a spouse or partner.
- An income over $200,000 individually or $300,000 combined with a spouse or partner in the last two years, with a reasonable expectation of maintaining the same income level in the current year.
Specific professional roles and qualifications also allow an individual to be considered an accredited investor. These roles include:
- Investment professionals who hold a Series 7 (General Securities Representative), Series 65 (Investment Adviser Representative), or Series 82 (Private Securities Offerings Representative) license.
- Directors, executive officers, or general partners of the company selling the securities or of a general partner of that company.
- Any “family client” of a qualifying “family office.”
- For investments in a private fund, “knowledgeable employees” of the fund.
How Can Entities Qualify as Accredited Investors?
Entities can also become accredited investors, depending on their structure or assets.
Entities owning investments worth more than $5 million qualify as accredited investors.
Certain entities with assets surpassing $5 million also qualify. This list includes corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family offices,” and any “family client” of such an office.
Owners as Accredited
If all equity owners in an entity are accredited investors, the entity qualifies as an accredited investor.
Investment advisers, whether they are SEC- or state-registered or exempt reporting advisers, along with SEC-registered broker-dealers, qualify as accredited investors.
Certain financial entities like banks, savings and loan associations, insurance companies, registered investment companies, business development companies, small business investment companies, or rural business investment companies qualify as accredited investors.
These definitions serve as the foundation for understanding who qualifies as an accredited investor. It’s important to note that while this guide has been compiled in alignment with the views of the Office of the Advocate for Small Business Capital Formation, it does not represent an official rule or regulation of the Securities and Exchange Commission. Therefore, it doesn’t have legal force or effect but is an informational resource.
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“I don’t sell houses. I grow your Assets” –Patrick Iturra, Asset/Investment Management & Consulting.