What Makes an Accredited Investor?

January 18, 2019

What Makes an Accredited Investor?

What makes an accredited investor?

When it comes to investing in most private securities, many of them require investors to be accredited. The problem is, not many people even know if they qualify for “accredited investor” status. To date, only about 3% of the population in the United States qualifies – which does sound small. However, that means there are about 10 million accredited investors in the U.S. – a shockingly large number. While the SEC and FINRA have tried to pave the way to help unaccredited investors gain access to private securities – it’s still a small market. Many larger companies don’t want to deal with the headaches of having 300 or 400 novice investors in a project, which is one of the reasons why they still only cater to accredited investors.

Who qualifies as an accredited investor?

To qualify as an accredited investor, you need to follow under one of the categories below:

  • Anyone whose individual net worth, or joint net worth with that person’s spouse exceeds $1,000,000 (excluding the person’s primary residence)
  • Anyone who has had income in excess of $200,000 in each of the two most recent years, or a joint income with a spouse of more than $300,000 (and can reasonably expect the same income in the current year)
  • Any trust with total assets in excess of $5,000,000

(The above-listed bullet points are the primary ways to show an investor is accredited, and to finish reading the entire list, please visit the SEC’s website)

Why does the accredited investor rule exist?

The SEC made the accredited investor rule, specifically to try and protect novice investors from getting duped in the private markets, and have them stick to public markets. The benefit for smaller investors in terms of investing in the stock market, is the fact there is essentially an unlimited amount of information to study for a specific company. Earnings reports are regulated. Quarterly calls with analysts are open to the public. Anytime an executive sells a substantial amount of stock, a notice is filed. If there are changes in a company’s growth forecast, the public is notified. These are all to the benefit of the investor, which typically is not done in the private markets.

With private-market investing, information is hard to come by. Instead of putting together a comprehensive exam to test an investor’s knowledge, they instead use the theory that the more money an investor has, either A) the more risk they are able to withstand, and/or B) the more sophisticated of an investor they likely are. You may argue all you want as to the fairness of it, however rules are rules. If you would like additional information on what makes an accredited investor, you should visit the SEC’s website here.

What are the benefits of being an accredited investor?

The primary benefit of being an accredited investor, is the ability to invest in private companies, – from startups, growth stage companies and real estate– gives investors the ability to increase their return potential, before the general public can take part. All of Northstar’s investment opportunities are strictly open to accredited investors.
How do I go about getting accredited?

There actually isn’t any documentation or exam that one needs to take – this responsibility falls on the manager.  The manager may keep it simple, such as an interview or requiring a questionnaire to be completed or they may need to review brokerage statements or tax returns; in some cases the managers will require investors to go through a third party such as VerifyInvestor.

If you have any additional questions, please do not hesitate to email us at investorrelations@northstarcp.com.