The idea of an accredited investor is an individual or entity that has a certain, necessary level of financial sophistication and ability. These individuals can handle risky investment opportunities, and some of these opportunities are not subject to particular SEC registration guidelines – they are only available to accredited investors. The accredited investor definition – according to the SEC – details who or what type of entity may qualify as an accredited investor.
Accredited investors are usually the only individuals or entities that may participate in certain investment vehicles, such as private equity and venture capital deals, hedge funds, and crowdfunded real estate opportunities.
To qualify as an accredited investor, individuals have two standard options and only one of the two must be satisfied.
Option 1: Income Test Qualification
The investor has a gross income of $200,000 or more or a married couple with $300,000 or more can qualify as an accredited investor. As a prospective accredited investor, you must meet this requirement for the last two calendar years and have a reasonable expectation of fulfilling the income threshold within the current year. In all three years, you need to use the same type of income – whether individual or combined – in order to meet the accredited investor definition.
Option 2: Net Worth Qualification
Your net worth may also allow you to qualify as an accredited investor. An individual or a married couple having $1 million in net worth (not counting the value of their primary residence) can qualify as an accredited investor.
For the purpose of accreditation, you can include assets other than the value of your primary residence in the calculation of your net worth. Along with your investments, you can also include the value of other assets you may own, such as real estate, for investment purposes. In a net worth calculation, the liabilities must be subtracted from the assets, except for the mortgage on your primary residence.
Through the income test and net worth qualifications, prospective investors have viable options for qualifying under the accredited investor definition. If you need assistance verifying the accredited status of prospective investors, contact an experienced accredited investor verification service today.