Here is the first thing you need to know about becoming or being an accredited investor. You need money to make money. Now that we’ve got your attention let’s delve into our short, yet comprehensive guide on how to become an accredited investor.

What Is an Accredited Investor?

To answer this question, let’s make use of another clever and catchy turn of phrase. And, for that, we’re going to tell you the following. If this is what you’re wondering about, you’re asking the wrong question. It’s not ‘what is an accredited investor?’ as much as it is ‘who is an accredited investor?’

The reason is that anyone out there can be one. As long as he or she has enough finances, there shouldn’t be any issue. Let’s break that down. Here’s the definition of an accredited investor, according to Rule 501 of Regulation D of the Securities Act of 1933 (Reg. D). In simple words, they explain it to us via two concepts – an individual’s net worth and the limits of his income.

Therefore, an accredited investor is any natural person who has an income which surpasses the sum of $200, 000. You must have had this stable income for the past two years. You can also have a joint income of $300, 000 with your spouse for those exact same years, should you wish to qualify as an accredited investor. Apart from this idea, you must have similar or exceed expectations for the year in progress as far as your income goes.

The Second Definition

The other definition which the Regulation of the Securities Act gives goes like this. An accredited investor is any natural person whose individual net worth or that combined with his spouse extends beyond the sum of $1 million. Mind you that it has to be at the moment when you purchase. Also, here’s another catch. The amount we mentioned cannot include the value of the house you are currently residing in.

Curiously enough, even though the Act passed back in 1933, as noted above, they introduced this last request to qualify only a few years ago. That happened in 2010. They called it the Dodd-Frank Act. Before that, your house could count as part of that million dollars you needed to own to become an accredited investor. All the people who found themselves in this situation in 2010 received permission to pass on.

How Can You Determine if You Qualify as an Accredited Investor?

As you might have imagined from the very definition, it is quite simple. There are two conditions: if you have been earning some $200, 000 or more in the past two years, and if you feel that you will do just as well this annum. If so, you will automatically qualify for the role of the accredited investor.

In the same way, let’s take into consideration definition number two. If you and your partner have earned a total of $300, 000 in the past couple of years and believe this year won’t be any different, then once again, congratulations!

1. See Your Worth

Needless to say, if your worth comes at a minimum of $1 million, you are now a certified accredited investor. Now, we are going to state again that the value of your house will not count as part of that million. You might think that we’re repeating ourselves and we are, but we are going somewhere with this. Here’s a piece of information you need to know at this point. The only circumstances in which your house will weigh as far as your net worth goes is if you have an underwater mortgage. The other one is if you have a balance on your home equity line of credit.

Let us give you a quick heads up on both of those concepts. The home equity line of credit is that type of debt which you have guaranteed with your house. In other words, your house is now a collateral. When you have reached a balance on your loan, that means you get to choose the schedule of the repayments. As long as you provide the minimum interest every month, you are in charge.

The other term, the underwater mortgage doesn’t mean you have a sunken property somewhere between the corals. In fact, underwater means an option which would become virtually worthless if it were to expire this very day.

2. Create Your Documents

Now back to the accredited investor status and how to qualify for it. The first thing you need to do to make absolutely sure you are right there is the following. Create a balance sheet for yourself and one for your spouse, should that be the case. List all your assets as well as your liabilities and subtract the latter from the former.

Assets include the value of your home, your mortgage, and your home equity line. They can also mean all your bank accounts, your car, your pension fund, as well as all other investments. Liabilities include your student loans and the ones you made to purchase your vehicle. They also comprise your underwater mortgage, as well as the balance on your home equity line.

If, after you’ve made the subtraction, your net worth is a minimum of $1 million, you are now an accredited investor.

investors talking

The Due Diligence as an Accredited Investor

Even though the official name does say ‘accredited investor,’ there is no institution that can give you this title. There is also no formal agency which can confirm you have accreditation. In the same way, there isn’t one which can issue you a certification of any kind. Even so, you should know the following.

Starting September 2013, the SEC decided that any person who wants to sell to an accredited investor has to go through some steps. They mean to verify that the person in question truly has what it takes to be one. Up until now, all you had to do was check a box. However, not anymore.

Seeing the Oportunities

Here’s how it goes. If you feel or know that you qualify to be an investor, then you can go check out different funds. While there, ask about their investment opportunities. When you do, the issuer can hand you a questionnaire which he will, later on, use to determine if you do, in fact, qualify or not.

This questionnaire may also ask you to attach your financial statements. Evidently, you must prove you have the money to invest before they let you do it. Some companies may also evaluate your credit score so that they can find out if you have any debt to your name or not.

Moreover, those individuals who want to be an investor taking into account how much they make every year will also have to complete a W-2 form. They must present their tax returns as well. They also have to bring forward some other types of documents that indicate wages. It all depends on what the issuing company asks for.

If you really want to secure your place, you may create a sort of portfolio for yourself where, apart from all the above, you can also add the following. Some letters from your tax attorneys or your CPAs and some reviews by investment brokers or advisors.

Final Thoughts

All in all, the conclusion to our short guide on how to become an accredited investor is somewhat circular. The reason is that, in the end, you only need one thing to make money from investing. Money.