Are You an Accredited Investor? Understanding Your Investment Options

An accredited investor is an individual or entity meeting specific financial criteria established by the Securities and Exchange Commission (SEC). These investors are deemed financially sophisticated and capable of assuming the risks associated with investing in unregistered securities.

To qualify as an accredited investor, you generally must:

Earn: Have an annual income of at least $200,000 in each of the past two years and expect to earn the same or more this year.

Hold: Possess a net worth of at least $1 million, excluding your primary residence.

Meet Other Criteria: Qualify based on specific criteria for certain entities, such as trusts, pension plans, or corporations.

Investing Without Accredited Status

While not being accredited limits your investment options, certain avenues exist:

Rule 506(b): This rule allows companies to raise funds from up to 35 non-accredited investors in addition to an unlimited number of accredited investors. However, the offering cannot be publicly advertised. A pre-existing relationship between the investor and the company is required. This means there should be a prior business or personal relationship between the two parties. The SEC believes that this pre-existing relationship indicates a level of trust and familiarity that can mitigate some of the risks associated with investing in unregistered securities. Evidence of this relationship might include previous business dealings, shared social circles, or existing investor-company communications.

Rule 506(c): This rule permits companies to publicly advertise their investment, but all investors must be accredited. The company is obligated to verify the accredited status of each investor.

Important Considerations

Investing in securities, regardless of accreditation, involves risk. Thorough research and potentially consulting with a financial advisor are crucial before making investment decisions.