Being an accredited investor can provide opportunities to invest in private market startups before they go public. However, not everyone qualifies to be an accredited investor according to the SEC’s guidelines. In this blog, learn more about who accredited investors are, how to know if you qualify, as well as some types of private market investments available to accredited investors.

Accredited Investors: What You Need to Know

In simple terms, an accredited investor is a person or business that may participate in certain securities offerings, like investing in startups. They are considered to be financially sophisticated and have a lower need for regulatory protection. “Accredited investors” is a term defined in Rule 501(a)—and also found in Rules 215 and 144A—of the Securities Act of 1933. This term describes the individuals and entities allowed to participate in investment opportunities offered under exemptions that do not have the disclosure, procedural, and investor protection requirements provided by registration under the Securities Act of 1933.

The SEC has historically maintained that the accredited investor definition is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act’s registration process unnecessary.” For example, you need to qualify as an accredited investor to invest in most venture capital investing opportunities.

Are you an Accredited Investor?

The former definition of an accredited investor applicable to a natural person was broadly based on net worth and income qualifications. However, the definition was amended in 2020 based on the SEC’s determination that wealth should not be the sole means of establishing financial sophistication.

The updated definition of an accredited investor expands the existing qualifications with amendments to revise Rules 501(a), 215, and 144A of the Securities Act. Now, the SEC allows individuals to qualify as an accredited investor based on certain professional certifications, designations, or credentials, as well as if they are “knowledgeable employees” of a private fund.

Criteria for Being an Accredited Investor

Financial Requirements

Individuals must have an annual income of at least $200,000 (or $300,000 if combined with a spouse) in each of the past two years, with a reasonable expectation of reaching the same income level in the current year.

Additionally, the existing income and net worth qualifications that apply jointly to an individual and his or her spouse are now expanded to include a “spousal equivalent,” which is defined as a cohabitant with a relationship generally equivalent to that of a spouse.

Alternatively, individuals can qualify if their net worth exceeds $1 million, excluding the value of their primary residence. This net worth calculation includes all assets (like real estate, savings, and investments) minus liabilities (like debts, mortgages, etc.).

Professional Designations

Certain professionals can qualify regardless of their income or net worth if they hold recognized certifications or credentials. For example, someone with a Series 7, Series 65, Series 82 license, or other similar financial designations, may be considered an accredited investor.

Entities as Accredited Investors

Banks, investment firms, insurance companies, and employee benefit plans may qualify as accredited investors if they have total assets exceeding $5 million. Also, certain non-natural person entities (such as limited liability companies, Indian tribes and governmental bodies, and “family offices”) may now qualify as accredited investors if they meet certain minimum asset or investment ownership qualifications described in the amendments.[1]

Let’s look at three scenarios to determine if these people are considered accredited investors or not.[2]

Some Types of Private Market Investments

Being classified as an accredited investor can open a world of investment opportunities not typically available to the general public.[3] Some of these opportunities include:

Private Equity & Venture Capital

Accredited investors can participate in private investment opportunities, including early-stage companies, startups, hedge funds, and private equity deals. These investments may offer potentially higher returns compared to publicly traded securities but also come with higher risks. Many potential high-growth companies, including those in the tech and biotech sectors, raise capital from accredited investors through venture capital.

Private Real Estate

Real estate is another way that investors may choose to invest in private assets. While this is an alternative investment option to investing in private companies, investors can choose to invest through house flipping, Airbnb rentals or other rental properties, commercial real estate, or even investing in raw land.

Private real estate funds are one example available to accredited investors. Typically, they are the only ones to have access to private real estate funds because they often deal with large amounts of capital, and the funds may not be registered with the SEC, making them exclusively available.[4]

Structured Products

Structured products are investment vehicles created by financial institutions that combine different types of financial instruments like equities, bonds, and derivatives into a single product. These products are designed to seek specific objectives, often linked to the performance of underlying securities.[5] These are typically offered to accredited investors due to the higher risks involved and are suitable only for experienced investors.

Final Thoughts

If you’re new to MicroVentures, you can sign-up for free. If you believe you qualify, you may select “Accredited” when prompted while you’re setting up your account. You’ll then schedule a brief call with the Investor Relations team to verify your accredited investor status.

If you already have an account with us and believe you qualify as an accredited investor, you can gain access to private offerings by verifying your eligibility. Email the Investor Relations team at help@microventures.com to set up a brief phone call. We’ll verify your eligibility over the phone and update your account status.

Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

Are you ready to invest in private companies? Sign up for a MicroVentures account to start investing!

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[1] https://www.sec.gov/newsroom/press-releases/2020-191

[2] https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3

[3] https://www.nppfabenefits.org/resource-center/investment/what-it-takes-to-become-an-accredited-investor

[4] https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/private-funds

[5] https://www.sec.gov/Archives/edgar/data/36995/000121465907002234/c101872fwp.htm

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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