How Do You Know if You Are an Accredited Investor?

Accredited Investor Defined 

The following definition comes directly from the web site of the Securities and Exchange Commission (http://www.sec.gov/answers/accred.htm).  Unlike many governmental regulations, this section is written in a fairly straightforward manner.

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."

This information is extremely important for real estate investing for two reasons: if you're offering property, you'll need to follow these regulations to the letter when soliciting other investors; and if you are a real estate investor, then you'll definitely want to be an accredited investor! 

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities; a business in which all the equity owners are accredited investors;
5. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
6. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
7. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.

Most individual investors who achieve accredited status qualify under either #6 or #7 above.  Note that some investments do not allow including the equity in a primary home as part of an investors net worth, so check with the program Sponsor for their requirements before spending significant time or money on due diligence.

Finally, note that the firm or person offering investment will require you to complete an Investor Suitability Questionnaire to establish that you meet the criteria for being an accredited investor.  Don't take it personally -- it's not that they don't believe you.  They're just complying with SEC regulations and must do this for all investors.