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Not all people are allowed to make exotic investments, and there's a good reason for that. Investments like early-stage startups and hedge funds are now subject to the full range of regulations that protect ordinary investors from excessive risks. Only accredited investors can invest in unregulated securities because they know what it takes to handle the risks involved.
What Are Accredited Investors?
This distinction begs the question, What is an accredited investor? According to the Securities and Exchange Commission (SEC), accredited investors are people who meet at least one of three requirements. An accredited investor must:
- Have a sustained annual income of at least $200,000 if single and $300,000 if married.
- Hold a Series 7, 65, or 82 licenses or be a knowledgeable employee of investment funds.
- Have a net worth of $1 million or more, excluding the value of a primary residence.
The purpose of this strict definition is to protect ordinary investors who are less likely to be able to weather significant losses. Of course, there are plenty of hedge funds and early-stage startups that make accredited investors a lot of money, as well. The inherent risk created by minimal disclosure requirements and high minimum investments is the problem.
How Do People Become Accredited Investors?
Meet one or more of the criteria described above and curious about How to become an accredited investor? Interestingly enough, while the criteria for making it into this elite group are strict, there is no official verification process. It's up to each company to verify whether people meet the criteria to become accredited investors.
Accredited investor vetting processes often involve requests for proof of income and net worth verification. Investors can expect to be asked for bank statements, proof of securities licensing, proof of employment, investment statements, and tax returns.
Types of Unregulated Investments
Most types of investments are heavily regulated by the federal government and are open to all people. Unregulated investments open only to accredited investors include:
- Hedge funds
- Real estate investment funds
- Private equity funds
- Venture capital
- Angel investments
Specialty investment funds
What all of these types of investments have in common is that they are private placements, which is why they are exempt from SEC guidelines.
Is It Worth the Risk?
It's up to every investor to decide his or her own risk profile, and accredited investors are no exception. Being able to meet the criteria to gain entry into this elite class of investors doesn't mean it's a good idea to start funneling money into unregulated investments. Just like ordinary people, accredited investors must consider the options carefully before deciding how to invest their money.
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| Author: |
| Harold Best |
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