What Is an Accredited Investor?
An accredited investor is a party who is allowed to trade unregistered securities not available to the general public. Accredited investors can be either individuals or business entities. Either way, they must satisfy requirements regarding income, assets, net worth, professional experience, or governance status in order to be entitled to trade securities that are not registered with financial authorities.
Requirements for Accredited Investors
In the United States, accredited investors must meet several official requirements. They must:
- Have an annual income of $200,000 or more for at least the past two years and the expectation that they will earn at least the same amount in the current year.
- Have a net worth exceeding $1 million.
- Be a director, general partner, or executive officer for a company issuing unregistered securities.
The rules that apply to business entities are slightly different. Those interested in learning about the differences can check out this in-depth article.
The Purpose of These Requirements
The purpose of any regulatory action in the financial industry is to provide appropriate safeguards for investors. Of course, this purpose is always balanced against an interest in promoting investment, even when it involves undertaking risky ventures or entrepreneurial activities. Such ventures may have a higher-than-normal chance of failure, but they also offer greater returns when they succeed.
The problem is that not all investors have the financial cushion or investment skill to understand what kinds of risks they are undertaking and absorb the potentially high losses. That’s why accredited investors are always either financially well-equipped or highly knowledgeable about the field. Those interested in increasing financial knowledge can learn all about the kinds of ventures undertaken by accredited investors online, although that won’t be enough to allow them access to this privileged circle.
How Can People Become Accredited Investors?
Because there is no formal process people can follow to become accredited investors, it’s the responsibility of sellers to check credentials and verify an individual’s status. Any individual or entity that wants to sell unregistered securities must take these steps, so read more here about how to vet accredited investors and avoid getting into regulatory trouble.
Are the Rewards Worth the Risks?
For those who qualify to be considered accredited investors, there’s one key question that should be answered prior to investing in any unregistered securities. Will the rewards be worth the risks? As a general rule, individuals and entities who want to invest in unregistered securities should only put as much money towards them as they can afford to lose.
