An accredited investor in the United States has the freedom to invest in certain types of unregulated securities, having proven that he or she retains the sophistication to understand the potential risks of participating in such an investment. This type of investor is required to pass the “accredited investor test” by meeting certain qualifications, outlined below.
The “Tests”
There are a number of ways to prove that you are an accredited investor. The most common tests in determining whether you have the proper financial sophistication to safely handle these investments are the Income test and the Net Worth test. For the Income test, if you earn $200,000 or more per year as an individual, or $300,000 or more per year with your spouse, and have a reasonable expectation of the same income level in the current year, then you qualify as an accredited investor. On the Net Worth side, if you possess a net worth of $1 million or more (not including the value of your primary residence), you are considered an accredited investor. There are several other ways you can also pass the accredited investor test in the United States.
The definition of accredited investor was revised and updated in 2012 with the passage of the JOBS (Jumpstart Our Business Startups) Act. Now, if you demonstrate sufficient knowledge, you can obtain this accreditation status. Accredited investors can now include financial advisors and others who demonstrate particular knowledge as confirmed by FINRA.
Opportunities Unlocked
Now that we have a clear picture of who qualifies as an accredited investor, we can go on to learn about the various types of investments available to them.
By restricting the sale of certain private securities to accredited investors only, the SEC is attempting to protect unqualified individuals from investments that may involve higher than normal risk to the investor. The opportunities that are available within this special asset class are only available to sophisticated investors who have, in essence, passed the accredited investor test.
Companies who are unable to afford the significant cost of complying with SEC registration requirements can take advantage of the opportunities available with unregistered securities. As a result, however, investors in these securities must be diligent and understand the benefits and risks associated with their potential investment. An unregulated security can include an investment in a private/startup company, which would be identified as a high reward, high risk investment. In other words, you could lose your entire investment in a startup. By comparison, investing in a well-established public company will carry a significantly lower risk of loss, while generally offering a lower rate of return.
