Accredited Investor Qualifications

Accredited Investor Qualifications: How To Become An Accredited Investor Without High Income Or Net Worth

Stock markets hitting record highs every day have many investors, including myself figuring out our portfolio’s diversification. Analyzing the list of best assets to buy, we notice that asset-based lending provides the best return on a risk-adjusted basis. Since asset-based lending involves lending money secured by assets, some protection level assumes the investment is accurately valued.

The rise of professionally managed platforms provides opportunities for investing in passive asset-based lending such as real estate syndicationfarmland, art, lawsuit financing, etc. Unfortunately, many of these investments are restricted to only accredited investors. An accredited investor status opens the doors to additional investment opportunities.

Today, let us explore the accredited investor definition. What are the accredited investor qualifications? In the past, accredited investor status was restricted to high-income earners.

As someone who did not have a lot of net worth or income at the start; but slowly improved my human capital, the accredited investor qualifications always felt unfair. Based on the revised Securities and Exchange Commission (SEC) guidance, you can qualify to be an accredited investor without the high income or net worth requirements.

Why Accredited Investor Restrictions Exist

The SEC regulations restricting investments to only specific investors’ categories resulted from past frauds. Since many unscrupulous promoters take advantage of investors promising high returns, the SEC put restrictions on investment in such opportunities.

The original accredited investor qualifications was based on high income and net worth. The rationale was that such investors could afford to lose money in investments compared to grandma living on social security.

The road to hell is often paved with good intentions. Many investors were left out in the cold, and the constraints restricted asset-backed investments to wealthy individuals making the rich even richer.

It is indeed ironic that individuals can open up margin accounts on Robinhood without understanding how options are traded. But loaning money at 10% backed by real estate is restricted only to high-income individuals.

After a lot of public comment, the SEC has now modernized the criteria for accredited investor qualifications.

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”

Jay Clayton, SEC Chairman

What Are the Qualifications To Be An Accredited Investor

The SEC has three main criteria to validate the accredited investor qualifications

  1. Financial
  2. Knowledge
  3. Entities

Investors can qualify based on meeting any one of the three criteria.

Accredited Investor Qualifications Based On Finances

You can meet the Financial qualifications for accredited investor definition based on either the income level or net worth.

Income Criteria

Accredited investor qualification is based on an annual income exceeding $200,000 ($300,000 joint filing) for the last two years with the expectation of earning the same or more income in the current year.

Net Worth Criteria

Accredited investor qualification is based on a net worth exceeding $1,000,000 (either individual or jointly) for the last two years. If you don’t know your net worth, sign up for free with Personal CapitalI use Personal Capital to track my net worth, budget, and also retirement planning.

How-to-track-your-net-worth-1

Accredited Investor Qualifications Based On Knowledge

The SEC improved the accredited investor definition and added the knowledge criteria.

Any individual can meet the accredited investor qualifications by having specific professional certifications, designations, or other credentials issued by an accredited educational institution.

The approved designations include individuals in good standing with the Series 7, Series 65, or Series 82 licenses. The SEC could also reevaluate and add additional certifications, titles, or credentials in the future.

Also, as part of the rule change is the SEC adding the term “spousal equivalent.” This means that if one spouse qualifies as an accredited investor, the person’s spouse does as well.

Accredited Investor Qualifications Based On Entities

The following can also qualify as accredited investors:

  • Financial institutions
  • A corporation or Limited Liability Company (LLC), not formed for the specific purpose of acquiring the securities offered, with total assets over $5M
  • Knowledgeable employees of private funds
  • Certain types of insurance companies

The entity-based criteria for accredited investor definition do not seem relevant to us except for the “knowledgeable employees of private funds.” However, it would be safe to assume that if a private fund already employs you, you might have better options at work as the employees of Renaissance and the money printing Medallion Fund.

If you do not have high income or net worth, the Accredited Investor Qualifications via professional designations such as Series 65 is the easiest route. Click To Tweet

How To Become An Accredited Investor Without High Income Or Net Worth

If you do not satisfy the traditional income or net worth accredited investor qualifications, the knowledge route is the best alternative.

The Series 65 license is now the fastest and easiest way to become accredited and participate in private investments.

The series 65 is an exam administered by the Financial Industry Regulatory Authority (FINRA) and provides individuals’ license to act as investment advisers in the U.S.

Fees$175
Hours of study neededApproximately 60 hours
Firm sponsor neededNo. Individuals can directly apply
Type of testAnswer 130 questions in 3-hour test
Series 65 license

After you pass the test and receive your license, you also need to be in “good standing” to meet the accredited investor definition as per the SEC.

On August 26, 2020, the U.S. Securities and Exchange Commission (“Commission”) adopted amendments to the definition of “accredited investor” which allows persons who hold a Series 65 license in good standing” to qualify as accredited investors. The SEC explained in its Small Entity Compliance Guide for Amendments to the Accredited Investor Definition that “Whether a person holds one of the designations in good standing is specific to that designation, and persons seeking accredited investor status under this category should consult FINRA rules and any state rules applicable to them. For example, a person seeking accredited investor status by passing the Series 65 exam would also need to be licensed as an investment adviser representative in her state and would need to comply with all state-specific licensing requirements (e.g., paying dues, etc.).”.

Please check with your state securities regulator for specific requirements.

You can now purchase securities not registered with the SEC legally. And a whole world of investment options from asset-backed lending to venture capital funds to angel investments is now available.

Series 7 is considered an entry-level exam. However, it requires your firm to sponsor you for the exam. As a result, series 65 is the easier option to meet the accredited investor qualification.

What are the accredited investor qualifications? Learn how to qualify to be an accredited investor without the high income or net worth requirements.

Documents To Determine Accredited Investor Eligibility

You cannot register as an accredited investor in one location. Every platform you want to invest in would need to verify your documents. Luckily, the list of documents to determine accredited investor status is minor.

If you rely on financial eligibility for accredited investor qualifications, you need to submit only your W2s and Tax returns.

If you rely on knowledge for accredited investor qualifications, you need to submit proof of your professional certifications.

Some investment platforms request the documents every year to recertify. Other investment platforms have only asked for documents in the first year and then let me continue to signup for new investments even after several years. Another reason I highly recommend signing up for these various platforms even if you do not plan to invest right away. If something changes, you might not be able to access these investments.

Benefits Of Accredited Investor Designation

After you meet the accredited investor qualification, you can now invest in a wide range of asset-backed investments. Some of my favorite investment platforms are

PeerStreet has a low $1,000 minimum, which allows for better diversification for accredited investors. You can define the criteria based on rate, LTV, duration, etc., and their Automated Investing feature automatically places you into investments that match your criteria. I use Automated Investing since the great deals are filled within minutes on their platform.

EquityMultiple is a real estate investing platform that gives accredited investors direct access to individual commercial real estate investment opportunities, allowing you to review, compare, and personally choose the deals that meet your investment criteria. Join EquityMultiple with low minimums of only $5,000 investment.

CrowdStreet is a commercial real estate investing platform for accredited investors. CrowdsStreet has a higher minimum of $25,000 per deal.

Farm Together provides accredited investors with an option to invest in farmland at the click of a button. You get the benefit of an experienced team evaluating various options before it is available on the platform. A crew takes care of farm management aspects such as insurance, accounting, leasing the farm, and working with the farmer. And finally to sell the farmland.

FundraiseMost of the real estate crowdfunding platforms are restricted to only accredited investors. Fundraise has a unique structure that permits non-accredited investors to investAlso, Fundraise has a low minimum (only $1,000).

The trade-off with Fundrise is that you cannot select one particular property; but rather an eREIT invested in several parcels. If you are a fan of diversification, the investment spread over multiple properties reduces the risk.

Investment PlatformOpen toType of InvestmentMinimum
PeerStreetAccredited InvestorsResidential $1,000
EquityMultipleAccredited InvestorsCommercial$5,000
CrowdStreetAccredited InvestorsCommercial $25,000
AcreTraderAccredited InvestorsFarmland$10,000
Farm Together Accredited InvestorsFarmland$15,000
FundriseAccredited and non-Accredited InvestorsResidential $1,000

PeerStreet, EquityMultiple, and AcreTrader are the best real estate syndication companies providing opportunities to compare and invest in residential, commercial real estate, and farmland deals, respectively, for accredited investors.

Fundraise provides opportunities for non-accredited investors to invest passively in crowdfunded real estate deals.

If you do not qualify as an accredited investor based on financials, you can still meet the accredited investor qualifications based on knowledge.

Accredited Investor Qualifications

Final Thoughts On Accredited Investor Qualification

I am glad the SEC has modernized the accredited investor definition to provide additional options for individuals without high income or net worth to qualify.

The knowledge-based test ensures that individuals understand the investments. It also provides an additional career option if you want to start a side hustle as an investment advisor.

Readers, have you tried to signup for accredited investment opportunities in the past? Do the new additional criteria make it easier to invest?

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2 Comments

  1. AJ Wright says:

    This makes it sound like all you have to do is pass the test and boom–you’re licensed.

    But this isn’t true. You have to become a licensed advisor in your state, and states have a lot of requirements beyond just passing the test.

    It would be better to have someone consult on this article who has actually been down the path, because you’ve oversimplified it to the point of being misleading.

    1. Can you clarify if your comment is related to passing the Series 65 to be licensed as an RIA? That is not the purpose of this article.

      This article is to satisfy the SEC accredited investor criteria by having the series 65 certification and being knowledgeable enough to invest.

      Of course, if individuals want to become an RIA, they have additional steps to complete and go on that route.

      Edit: Never mind. I see what you mean and added the additional paragraph on “good standing”. Thank you for pointing it out

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