You may have heard the term “accredited investor” before. For example, you might have seen a discussion about someone investing in a company, and it comes up that they are accredited. Being an accredited investor can open up a world of opportunities that are not available to non-accredited individuals.
In this post, let’s explore more about what it means to be accredited, how you can get this designation, and what investment opportunities it allows!
An accredited investor is an “individual or business entity that is allowed to trade securities that may not be registered with financial authorities.” In other words, an accredited investor doesn’t need to buy or sell something on the stock market – they can buy any investment at any time.
How Do I Become an Accredited Investor?
There’s a common misconception that you have to apply or do something to become an accredited investor. You don’t. Becoming an accredited investor doesn’t involve paperwork. You merely have to meet the minimum criteria that the SEC provides. If you meet the requirements, you’re automatically an accredited investor.
Accredited investors must either:
- have earned more than $200,000 for the last two years ($300,000 for joint filers) and have a reasonable expectation of making at least that this year, or
- have a net worth exceeding $1 million, either individually or jointly with their spouse.
As noted above, if you meet the above criteria, you are automatically an accredited investor. No paperwork required!
Companies can also be accredited investors provided that they have assets exceeding $5 million. A company can also be an accredited investor if its equity owners are accredited investors. For example, let’s say John and Jane own company X. If both John and Jane are accredited, X is also accredited.
Whether you are accredited or your company is, this designation means that you can take advantage of very different investment opportunities than non-accredited people.
What Can Accredited Investors Do?
Accredited investors have the freedom to invest in pretty much anything. Non-accredited investors only have the option to invest in standard categories, like stocks, bonds, and real estate.
The best way to illustrate what an accredited investor can do is to showcase the types of investments that accredited investors can make. Anyone can invest in the stock market, but only accredited investors can make entire angel investments (initially, only accredited investors could complete any form of angel investment, but now anyone can participate in this investing round via a crowdfunding platform). Accredited investors can also invest in hedge funds, private equity, crowdfunding, and venture capital.
Essentially, any investment is open to someone who meets the accredited definition. It provides the ultimate investment freedom!
Why Did the SEC Create This Designation?
The idea behind the accredited investor designation is that people who do not have the financial resources to weather a financial hit cannot do so. Public equities, like those you find on the NYSE and NASDAQ, are tightly regulated. They must file forms with the SEC and the SEC has the authority to launch investigations into investment misdeeds.
However, when you invest in Random Company, you might lose the entire investment, or you might be like Peter Thiel and hit the next Facebook. There’s often more risk, but usually, there’s a much bigger potential reward. And, in the case of angel investing, for example, you often have the opportunity to sit on the board and provide guidance to help your investment.
For the latter investment types, to prevent potential complications, the SEC created the accredited investor category. The idea is that if investors have more than $200k coming in annually or they have $1 million in assets, they can, hopefully, weather a potential loss much more effectively. High income or high net worth individuals also likely have much more exposure to investing in general, making them much more likely to do proper due diligence and research before selecting a company or fund in which to invest.
Accredited Investing and Mack Capital
Accredited investors can invest in private equity companies. That means individuals and businesses with this designation can invest in funds that we offer at Mack Capital. Our Mack Funds leverage proprietary strategies to grow non-invested capital. These funds also seek acquisition targets.
If you’re an accredited investor and would like to schedule a consultation about our financial offerings, please contact us. Our investment team can work with you to provide you more information on the funds we offer and the value we provide to investors every day.