The concept of accredited investors has become increasingly prominent in the world of finance and investment. A person who meets the definition of an accredited investor is considered to have a higher net worth and income than the average American and is thus eligible for certain investments that may not be available to non-accredited individuals. But what does it take to be an accredited investor, and how many Americans actually meet these requirements?
In this article, we will explore the definition of an accredited investor, what percentage of them exist in America, who they are, the criterion for becoming an accredited investor in the U.S., and what accredited investors should know about investing.
Accredited investors are those individuals and entities that have met the criteria set forth by the Securities and Exchange Commission (SEC) for investing in unregistered securities. Accredited investors are often high-net-worth individuals or entities with extensive experience in financial matters and significant assets.
Who Are Accredited Investors?
They typically have access to investments not available to the general public, such as hedge funds, private placements, venture capital, and equity crowdfunding.
According to Don’t Quit Your Day Job (DQYDJ), accredited investor households controlled roughly $73.3 trillion in wealth in 2020. This staggering amount represented around 76.3% of all private wealth in America measured by the 2019 Survey of Consumer Finances (SCF). This translates into an enormous amount of buying power – far more than what non-accredited investors can access. This immense financial influence gives accredited investors unique advantages in investing opportunities outside traditional stock markets.
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The SEC’s Definition of an Accredited Investor
In order to be considered an accredited investor, a person must meet specific income and net worth thresholds. The exact definition of an accredited investor is outlined by the SEC in Regulation D of the Securities Act of 1933. To qualify as an accredited investor, an individual must have an annual income over $200,000 ($300,000 for a married couple) or a net worth exceeding $1 million at the time of purchase (excluding their primary residence) or a net worth over $1 million excluding her primary residence.
Given these requirements, accredited investors tend to be highly sophisticated when making investment decisions related to their capital. While they have access to exclusive opportunities and products through private placements and other financing vehicles, these investments carry a higher risk than traditional securities offerings registered with the SEC. As such, accredited investors must conduct due diligence before deciding whether or not any particular security offering is appropriate for them to invest in.
The Benefits of Being an Accredited Investor
Investing as an accredited investor has its benefits, as it allows early access to innovative companies that may require large amounts of capital and provide high returns due to their growth potential. Alternatively, some investment funds may only allow accredited investors to partake in their services since they require high minimums due to the extra risk associated with investing in unregistered securities. The ability to invest as an accredited investor gives experienced investors more freedom when looking for higher returns or potential market-changing opportunities.
Additionally, accredited investors have a variety of advantages that participating investors do not have access to, including higher yield opportunities and more diversified portfolios, making it an attractive option for individual investors and business investment companies. While individuals must meet particular net worth or income criteria to obtain accredited investor status, the rewards are well worth it due to the high benefit potential. By gaining access to higher yield opportunities, participating investors can effectively diversify their portfolios and increase their wealth.
Specific Criteria for Becoming an Accredited Investor in the U.S. and How to Find Out If You Qualify
Becoming an accredited investor, according to the SEC in the U.S., involves meeting specific criteria and can determine whether an individual is eligible to access investments that are not available to non-accredited investors. Individuals must satisfy one of the following categories the SEC sets to qualify as an accredited investor. While having met the definition of an accredited investor, as mentioned above, is one way to find out if you qualify, there are also a few other requirements that the SEC takes into consideration, including:
- Entities with assets in excess of $5 million, such as corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, and employee benefit plans
- Owners as accredited where all equity owners are accredited investors
- Investment advisors, SEC- or state-registered or exempt reporting advisers) and SEC-registered broker-dealers
- Financial entities, including banks, savings or loan associations, and insurance companies
- Professional investors can also qualify as accredited investors if they hold any of the following licenses: Series 7, Series 65, Series 66, or Series 82.
- Professional directors, executive officers, general partners, or family clients (of a family office) may also fall under this category.
- For investments in private funds, certain employees known as “knowledgeable employees” may also qualify as accredited investors if they meet specific criteria outlined under Section 3(c) of the Investment Company Act. In this case, knowledgeable employees must demonstrate a sound understanding of venture capital deals and be knowledgeable about potential risks associated with investing in unregistered securities such as syndicated notes, etc.
Those wishing to determine if they are qualified to become an accredited investor should first understand the requirements. After that, it’s essential to review your particular circumstances and consult with a qualified accountant or financial adviser who can guide how best to become an accredited investor according to the SEC guidelines. Additionally, anyone interested should also research applicable state laws that may conflict with federal regulations regarding becoming an accredited investor.
What Percentage of Americans Meet the Criteria?
Despite their relatively small percentage of the population, accredited investors in the United States hold a disproportionate amount of wealth. In fact, according to the 2016 Survey of Consumer Finances, accredited investors make up less than 10% of the U.S. population, yet they hold 76% of all U.S. household wealth. That figure jumps to nearly 30% when looking solely at accredited investors over 65 years old. Since mid-2018 there were approximately 12.5 million and 13.5 million accredited investor households in the United States.
These statistics’ further emphasize the magnitude accredited investors have on overall wealth distribution in the U.S., as these older individuals are estimated to hold approximately $5.5 million in average invested assets per household — significantly more than non-accredited investor households, who typically have under $1 million in invested assets per household. These numbers demonstrate the influence and control accredited investors have over U.S. investments and financial markets, even though they make up a small portion of the population.
Given their remarkable creative and monetary assets and influence, accredited investors have become highly sought after by companies looking to gain early access to capital and resources as well as establish long-term business relationships through private equity investments or angel funding opportunities –— making them a valuable part of our economy today and far into the future.
Navigating Regulation D For Startups: What You Need to Know About Seeking Investment
Rule 506 of Regulation D is a vital law for startups to be aware of, as it provides the means for companies to raise money from accredited investors without having to go through the costly process of registering their offerings. It allows companies, including Startups, to offer and sell Securities without registering with the SEC, provided that specific rules (outlined in Rule 506) are followed.
At its core, Rule 506 allows companies, including startups, to raise money through the issuance of securities without having to go through the extensive and costly process of registering their offerings with the Securities and Exchange Commission (SEC). With this in mind, companies must understand that there are rules associated with a Regulation D exemption, and those rules must be followed to qualify.
More specifically, Rule 506 provides companies with two ways of engaging and approaching potential investors: a private offering or an offering with general solicitation. The difference between the two lies primarily in how companies interact with potential investors; a company pursuing a private offering can only approach investors that meet specific qualifications regarding their net worth or sophistication, whereas an offering conducted with general solicitation involves advertising to anyone who may be interested in investing. This ability has opened up many opportunities for issuers in various industries, such as commercial real estate. By leveraging digital marketing channels, these sellers can reach far more potential investors – thus increasing their chances of raising money effectively.
Regardless of the route taken, some basic requirements must be met when utilizing Rule 506. Companies must ensure they limit their offerings to accredited investors only – those who can demonstrate sufficient financial sophistication or have a high net worth – and limit the number of non-accredited investors participating in any given offering. In addition, detailed information must be provided about the nature of the investment before any sale takes place. Finally, all deals must occur within one year from the initial filing date for any particular offering.
For startups seeking funding from accredited investors, understanding Rule 506 and its implications are critical to avoid running afoul of SEC regulations. Being mindful of the requirements associated with private and general solicitations under this rule and other considerations, such as a limitation on non-accredited investor participation, is crucial. By doing so, startups can more safely pursue capital raising activities under Regulation D without fear of legal repercussions later on down the line.
How M Accelerator Can Help Startups Obtain the Proper Funding
M Accelerator offers a unique fundraising strategy for early-stage & later-stage businesses that are looking to access U.S. accredited investors and other types of investors. Among many strategies, this program also shows startups the fast-track funding strategies via Regulation D offerings and is specifically tailored to Pre-VC companies.
Through this program, M Accelerator guides businesses through the complex process of obtaining capital investment from qualifying investors. Companies can also expect assistance crafting effective presentations and developing comprehensive investor relations plans. In addition, M Accelerator also provides helpful insights on prospective investment resources such as angel investor groups or venture capitalists.
While providing personalized advice and guidance on raising capital can help benefit companies large and small, M Accelerator also offers education sessions on fundraising to help startups find the best financial route for their business. These sessions are designed to help entrepreneurs understand more about the complex world of finance to make informed decisions regarding their businesses.
For those who would like more hands-on assistance during the fundraising process, M Accelerator’s team members are available to help startups answer these fundamental questions and help guide entrepreneurs through any steps that may be confusing or overwhelming. We also offer one-on-one consultations, which allow for more in-depth conversations about specific aspects of an individual’s business plan or financial projections. For more information on joining this program, please visit our website.
