In order to make money, often money has to be invested in the first place. Accredited investors have access to an array of more opportunities to achieve this goal than do non-accredited investors. The Securities and Exchange Commission (SEC) permits private funds and companies to bypass the normal registration criteria for investments as long as these companies offer and sell their securities to accredited investors. So how do you become an accredited investor?
The SEC determines who can take part in the types of investments available to accredited investors. These investors have the opportunity to invest money into a range of financial sectors, including venture capital, hedge funds, private placements, private equity, and equity crowd funding.
A misconception in the answer to the question of “How do you become an accredited investor?”, is that a particular process is in place to determine how an individual becomes such an investor. However, no independent body or government agency makes a review of an investors qualifications or credentials, and no piece of paper or exam exists that declares a person such an investor. Actually, the companies issuing unregistered securities are required to conduct a level of due diligence prior to the sale of those securities regarding a potential investor’s status.
The Due Diligence
The SEC, since September 2013, has required that any person or entity selling to accredited investors under Rule 506(c) offerings to take “reasonable steps” in order to verify accredited investor status. So to answer the question “How do you become an accredited investor?”, the entity or person issuing the securities does due diligence to confirm qualification of the investor as having an accredited status.
Companies seeking to verify the accredited status of investors may require financial statements and information about other accounts and assets in order to complete the verification process. They may also require a credit report to assess the debts of an individual seeking accredited status. Individuals who seek to qualify based on annual income will likely need to submit tax returns, W-2 forms, and any other documents that confirm income. Other items required may include letters or reviews from investment advisers or brokers, tax attorneys, and CPAs.
