From time to time, I come across investment opportunities that are only available to accredited investors. It’s often enough that I think it warrants today’s article explaining accredited investor status, since you’ll need to be an accredited investor before you can invest in some of these alternative platforms.
What’s an accredited investor?
Essentially, it’s someone the SEC believes is rich enough that they can lose significant amounts of money investing in platforms or securities that are less-regulated and require less disclosure than an investment found on the public stock markets.
Lawyers are often targets for private investments because they may qualify as an accredited investor.
Accredited Investor Requirements
- A bank, insurance company or registered investment company.
- An ERISA employee benefit plan with total assets in excess of $5 million.
- A charity, corporation or partnership with assets exceeding $5 million.
- A director, executive officer or general partner of the company selling the securities.
- Any business entity in which all of the individual equity owners are themselves accredited investors.
- A natural person with a new worth in excess of $1 million, excluding the value of the individual’s primary residence.
- A natural person with income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000 of those years) and a reasonable expectation of exceeding the same amount in the current year; or
- A trust with assets in excess of $5 million.
As you can imagine, lawyers mainly qualify under the income qualification, although many lawyers won’t qualify at all unless it’s later in their investment career and they’ve achieved a net worth of over $1 million, excluding the value of their primary residence.
Why do we have accredited investor status?
The SEC was formed to protect investors. Interesting sidenote: The first SEC commissioner, Joseph P. Kennedy, wrote regulations that outlawed insider trading, a method he used to generate an immense amount of wealth in the 1920s.
I suppose the thinking is that if you’re an accredited investor, you don’t need the same level of protection as a non-accredited investor. Given that you can be an accredited investor and lose your entire investment, I’m not sure this makes a lot of sense, but presumably some lobbying was involved in setting the thresholds and the wealthier class of investors didn’t want these restrictions to apply.
Rest assured that you can go your entire life without purchasing an investment that requires you to be an accredited investor.
However, if you invest in something that does require accredited investor status, there will be very few regulations that protect you. You’ll need to do your own due diligence on the investment and could potentially need the expertise of advisors (lawyers, accountants, etc.) that may eat up some of the investment returns.
Qualified purchaser vs accredited investors
Occasionally there is some confusion over the difference between a qualified purchaser and an accredited investor, mainly because people will use the term “qualified investor” which isn’t an actual SEC term.
While you may be an accredited investor, you are almost certainly not a qualified purchaser. To be a qualified purchaser, you’d need at least $5,000,000 in investments or to be an investment manager (or company) with at least $25,000,000 in investments.
In other words, qualified purchasers are super accredited investors. If you’re a qualified purchaser, the SEC things you’re sophisticated enough to be making all kinds of your own investments without SEC oversight. Note that there is no income requirement to be a qualified purchaser. Having a high income is no longer enough, you actually need to be wealthy.
Investment opportunities for accredited investors
It’s beyond the scope of this article to talk about all the types of investments that open up to accredited investors, but here’s a few that become available:
- Private Equity. Private equity includes the entire investment sphere of non-public investments. Private equity typically raise money from institutional and non-institutional investors.
- Start-ups. Accredited investors can be angel investors that directly invest in start-ups and private companies.
- Hedge Funds. You’re not getting into a hedge fund unless you’re an accredited investor. But then again, why would you?
- Real Estate Crowdfunding. Most of the real estate platforms are only available to accredited investors.
Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money. He’s also maxing out tax-advantaged accounts like 529 Plans to minimize his taxable income.