An accredited investor is an individual who meets the criteria defined by the SEC. Until 2020 the SEC used two criteria, income, and net worth. Now certain professional certifications can qualify you as an accredited investor.
How to become an accredited investor
If you meet one of the following criteria, you’ll be an accredited investor:
- Have a personal income greater than $200,000 (or a $300,000 household income) in each of the past two years.
- OR
- Have a net worth greater than $1 million dollars excluding the value of your house.
- OR
- Have one of the following Professional Certifications: Series 7, Series 65, or Series 82.*
*Amendment announced on Aug 26th, 2020
Why did the SEC create the accredited investor definition?
Federal law states that all companies that sell securities register with the SEC. There are exemptions to this law. One exemption is that the company only sells its products to accredited investors.
The accredited investor definition provides a quantifiable description for a “sophisticated investor.” The SEC believes sophisticated investors can evaluate the risks of non-registered securities.
Government loopholes baby!
What’s the benefit of being an accredited investor?
Federal law limits the purchase of non-registered securities to accredited investors. If you qualify as an accredited investor you can access these private market investments. Private market investments can offer high returns. However, private market investments are less liquid than public securities. There is no free lunch in investing.
SMH Takeaways
- I don’t understand how having a high income makes you a sophisticated investor.
- Having a liquid net worth greater than 1 million dollars is a better proxy but it’s still a stretch.
- The latest criteria, professional certifications, require many hours of studying the financial markets. Maybe the next criteria will be the best yet!
- If you qualify to invest in unregistered securities doesn’t mean you should.
- You can achieve financial freedom by sticking to publically traded stocks and bonds