Is It Worth Being An Accredited Investor? 

When people begin investing, they often set certain goals for themselves. Many of them revolve around income or the gain in their portfolio value. Not many set a goal of being an accredited investor. Instead, becoming accredited is usually a byproduct of accumulating wealth.

What accreditation does, however, is important. It opens up the variety of investment categories in which a person or entity can participate. Accreditation acts as a guardrail and barrier to entry to some investments. These investments may be riskier than those in the public markets but they also have the potential to be more lucrative.

There is a limited barrier to investing in the stock market. Anyone over 18 can open a brokerage account and start investing. People can also invest at a younger age through custodial accounts. For accreditation, the test is less about age but about a level of sophistication. 

What Qualifies An Accredited Investor? 

There are two main ways accredited investors qualify. The most common is a wealth test. The Securities and Exchange Commission has put a rule in place for financial qualification. Anyone with a net worth over $1 million, excluding a primary residence, can become an accredited investor. There is also a secondary test for people who haven’t achieved that million-dollar milestone yet. If an individual makes $200,000 for the past two years and expects to make the same for the next year, they can qualify. That number goes up to $300,000 if you invest with a spouse or partner. 

A second way to qualify is through a professional designation or occupation. Professionals who have the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82) are eligible to be accredited. General partners, directors, or executive officers of a company selling the securities may also be eligible. 

Entities can also be accredited if they own more than $5 million in assets. This often refers to corporations, trusts, nonprofit organizations, and limited liability corporations as well as family offices. Accredited investors must be able to verify their status. 

The Advantages Of Being Accredited

The main reason to become accredited is to gain access to private placements, hedge funds, venture capital, private equity, and other higher-risk, higher-reward vehicles. These accredited-only investments are often at a higher risk but can have a significant upside. Most billionaires like Jeff Bezos, Michael Dell, and Laurene Powell Jobs have a family office. They often use these family offices to gain early access to promising young startups that need capital. This early access can result in substantial gains if the company succeeds.

A core benefit of being accredited is diversification. Investors looking to generate income and find returns outside stocks and bonds may be interested in other asset classes. This can include real estate syndications, private debt offerings, cryptocurrency funds, and other alternative investments that help add resilience to their portfolios. 

What Is The Risk Of Being Accredited?

Being accredited in itself is not a risk. The risk comes with investing as an accredited investor. Any investor can lose money, accredited or not, but investing in accredited deals may come with fewer protections than other investments. 

Investing in venture capital can result in a major loss of capital. Large venture capital firms like Andreessen Horowitz or Sequoia Capital make many investments each year and expect to lose money on most of them. The successful ones tend to make up for the failures. For individual investors with less capital to lose, investing like the big venture firms can be dangerous. 

Being accredited may mean doing your homework – a lot of it. In the real estate space, most companies seeking investments through Regulation D crowdfunding will share various materials with investors. This can include webinars and offering memorandums. It can be complicated to wade through and understand how your investment sits within a larger framework of the amount of money being raised for a project or product and where your returns will come from.

 It may also complicate your taxes. Depending on the investment and how it performs, you may be able to record some losses, which can offset gains in other areas. Some real estate projects will allow you to claim depreciation, which can reduce your passive income taxes. However, the additional complexity may mean that if you handled your taxes yourself, you may want to consider bringing in a tax professional. 

Investing always requires patience, but this is even more true when it comes to many accredited investing offerings. You may be waiting for a company to become profitable or a real estate project to be built and leased. This can take many years. The assumptions made in the offering documents may not come true, and you could lose your entire investment. 

Being an accredited investor opens the door to exclusive investment opportunities, but it requires a deep understanding of the associated risks. These investments may increase your returns but just as family offices and pension funds invest in a wide range of places, from public equities to bonds to private credit, individual investors may also want to spread their wealth around for greater protection balanced by the potential for higher returns.