The general public does not have access to certain types of investments. For instance, most people cannot just choose one day to start investing in offerings available only to accredited investors, such as hedge funds, some venture capital funds, and many private equity investments. Obtaining accredited investor status is necessary to participate in these types of investments. There are multiple ways to achieve accredited investor status, with financial wealth being one of the prominent ways.
An accredited investor is a person or entity or trust that possesses a certain level of financial sophistication that gives them the ability to safely and effectively evaluate certain, riskier investment opportunities. Such an investor must meet certain established criteria to achieve accredited status.
The Income Test
To prove your accredited investor status you may qualify via income. The income test requires that a natural person with income exceeding $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent exceeding $300,000 for those years and has a reasonable expectation of reaching the same income level in the current year. This may involve providing such items as financial statements, account information, and balance sheets to help in the verification process. Other items needed may include W-2 forms, tax returns, wage or salary tips, and the involvement of tax attorneys or tax advisors, or brokers. An issuer may also check your credit report as part of the verification process.
Qualifying to Become an Accredited Investor
There are several factors that can be used to qualify for accredited investor status. This provides a safeguard for the investor and the issuer, and the opportunity itself. Regulators try to avoid the promotion of investments in risky offerings, which can have a very large return on investment, but a high rate of failure. Regulators also need to safeguard the interests of individual investors who have less knowledge than more sophisticated investors and may not completely understand these investments or have the financial capacity to sustain high losses if an investment fails.
The accredited investor regulations are established to protect individual investors first and foremost. There are strong safeguards in place to help ensure only investors with the right financial or other qualifications can enter into these opportunities.
