Newbie investors who encounter opportunities that are open only to Accredited Investors sometimes wonder, “Should I become an Accredited Investor?”
The fact of the matter is that “Accredited” is not something one “becomes;” you either meet the definition or you don’t.
You meet the definition of an accredited investor if you have:
Over $1 million net worth, excluding any equity in your primary residence, or
Make over $200,000 per year if you are single*, or
Make over $300,000 a year if you are a married couple*.
*The income classification requires that you have met the qualifications for the past 2 years with an expectation that it will continue indefinitely into the future. There are other definitions for legal entities, but generally, the entity must have >$5M in equity or all of their members/beneficiaries/shareholders must meet the accredited definition above. Sponsors/managers of their own securities offerings also fall within the definition of an Accredited Investor.
The confusion seems to stem around whether one should get “verified” as an Accredited Investor, which entails getting a certification letter from your own CPA, Attorney, or Registered Investment Advisor, or from a third-party verification company, which reviews the investor’s financial information and then “verifies” whether the investor meets the definition above.
An investor’s Accredited status must be verified to invest in a securities offering that has chosen the Regulation D, Rule 506(c) exemption (which allows the issuer to advertise or crowdfund the investment opportunity). The burden is on the issuer of a Rule 506(c) securities offering to have a reasonable assurance that all investors are accredited, prior to accepting their funds. However, the SEC requires that the verification is dated within 90 days of the investment. So it won’t help you to get “verified” now unless you will be making an investment in a Rule 506(c) offering within the next 90 days.
Note: The Regulation D, Rule 506(b) securities exemption does not have the same verification requirement. In a Rule 506(b) exempt securities offering, the investors can self-certify that they meet the requirements. But investors must have a pre-existing relationship with the sponsor of the offering before being allowed to invest, so if you don’t want to go through the third-party verification process, you should develop pre-existing relationships with sponsors of Rule 506(b) offerings, who will let you personally know if they have an opportunity. They are still required to ask if you meet the qualifications and you do have an obligation to be truthful, but you may not need to cough up financial or income statements to be allowed to invest, and you won’t have to get re-certified within 90 days of making the investment.
We get potential clients who reach out to us every week who want to start a fund. While we could simply take their money and set them up with fund offering documents, we actually talk a lot of people out of doing a fund. Why? Because they don’t have the necessary...