The world of investing is full of complex terms and titles that may be confusing for those who are new to it. One such term that you might come across is 'accredited investor'. This term has significant implications for who can participate in certain types of investment opportunities. In this blog, we will demystify the concept of the accredited investor and explain what it means for your investment journey.
Understanding the Basics
An accredited investor is a person or a business entity that is allowed to deal in securities that may not be registered with financial authorities. They are considered 'accredited' on the assumption that they are knowledgeable and sophisticated enough to understand and take on the risks associated with unregistered securities.
Criteria for being an Accredited Investor
The SEC provides specific criteria to define who can qualify as an accredited investor. As of the time of writing, to be an accredited investor, a person must meet at least one of the following requirements:
Have a net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of their primary residence.
Have an income exceeding $200,000 in each of the two most recent years (or $300,000 combined income if married) and the expectation of the same income level in the current year.
For entities such as trusts, corporations, or partnerships to be considered accredited investors, they must have assets exceeding $5 million.
Why does being and Accredited Investor matter?
Being an accredited investor opens up a wider array of investment opportunities. Certain investments are only available to accredited investors due to their risk profile or the nature of the investment. These can include private equity funds, hedge funds, venture capital investments, and certain private placements.
These investment types often involve higher risk and are less regulated than public market investments. They can, however, offer higher potential returns and provide valuable diversification for an investment portfolio.