How to Become an Accredited Investor

Accredited investors enjoy the privilege of being able to invest in a wide range of opportunities outside of the United States Securities and Exchange Commission’s (SEC) tight regulatory control. Many of these opportunities offer more than double the typical return on regulated financial vehicles. This guide discusses the different ways you can become an accredited investor, along with the pros and cons of investments that are exclusively available to accredited investors, such as our own Kona Development Partners, LLC.

Definition of an Accredited Investor

An accredited investor is a person or entity who qualifies to invest in opportunities outside of SEC-registered asset classes. The term “accredited investor” is central to Regulation D (“Reg.D”). It falls under the auspices of the Securities and Exchange Commission (SEC), covering investors it regards as financially sophisticated.

Dodd-Frank Wall Street Reform and Consumer Protection Act guides the SEC in determining who qualifies as an “accredited investor,” It prefaces that accredited investors understand how to deal with the numerous uncertainties the SEC routinely covers in its regulated arena. In other words, it calls for a demonstration of two investor attributes:

  • Financial insight
  • An ability to analyze complex situations. 

Regulatory control of opportunities for accredited investors is significantly less than that applied to the registered investment categories. A broad asset category under Reg.D is exempt from (SEC) compulsory registration. It embraces many options that fit the "private equity fund” profile.  Private equity refers to capital investment made into companies that are not publicly traded.

Non-accredited individual investors have more restricted options that are more closely monitored and controlled by the SEC, such as:

  • Publicly traded equities, treasury stocks, indexes, and mutual funds
  • Exchange-Traded Funds (ETFs) and REITs (real estate investment trusts) 
  • Debentures and bonds
  • Swaps 
  • Futures and derivatives 
  • Cryptocurrency transactions
  • IPOs (Initial Public Offerings)

What it Takes to Become an Accredited Investor

The SEC requires that accredited investors demonstrate “financial sophistication” based on wealth, income or professional criteria. Once these criteria are met, an individual can find the right opportunity to actually invest, such as InvestinKona.com. 

In 2020, reliable sources estimated that 13.6 accredited investor households were active in the US,  slightly above 10.6% of the country’s aggregate 128 million. Per household net worth averaged $5.4 million for a total wealth of approximately $73.3 trillion. In short, this is no fringe segment in the aggregate investment landscape.

Requirements for Accredited Investors

According to the U.S. Securities and Exchange Commission, a potential investor must meet the following criteria:

Financial Criteria - Accredited Investor Income Test

  • Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year (with appropriate documentation)

Financial Criteria - Net Worth Test

  • Net worth over $1 million, excluding primary residence (individually or with spouse or partner). (Note that establishing net worth requires extensive documentation of both assets and liabilities, such as credit reports outlining outstanding liabilities, property deeds with appraisals, equity valuations and even IRS tax returns.)

Professional Criteria

  • Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
  • Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company)
  • Any “family client” of a “family office” that qualifies as an accredited investor
  • For investments in a private fund, “knowledgeable employees” of the fund

How Do Firms Determine if You are an Accredited Investor?

Qualifying as accredited requires answering specific questions the investment sponsor asks, with SEC-mandated backup that proves your submitted facts. The onus rests on the general partners running the operation to prove they conducted due diligence. Investment promoters will request you to sign a section in their agreement indemnifying them from any misrepresentation that may emerge in the future. 

3rd Party Verification Letter

The most common (and least invasive) way to document accredited investor criteria is through a 3rd party accredited investor verification letter. Registered broker-dealers or investment advisors, attorneys, and licensed accountants (i.e., a CPA) can provide investment candidates with a third-party, single-page, signed letter confirming that their client aligns with the benchmarks on at least one of the primary requirements (see below).

By obtaining a 3rd party verification letter as an accredited investor, there’s no need for the client to verify compliance painstakingly, item by item. Without a 3rd party letter, a candidate must provide detailed verification.

3rd Party Online Websites Such as VerifyInvestor.com

Reputable 3rd party sites like VerifyInvestor.com offer an alternative route to prove accredited investor status. They will require documentation, such as: 

    • Financial statements and details of other accounts
    • Credit report for confirming net worth
    • Tax returns
    • W-2 forms and other documents indicating earnings
    • “Knowledgeable employees” of the issuing fund
    • Professional certifications, designations or credentials administered by the Financial Industry Regulatory Authority (FINRA).

What is a Qualified Purchaser vs. an Accredited Investor?

Qualified purchasers are generally institutions or mega-funds seeking diversification from their SEC-registered portfolios. It's significantly harder to pass as a Qualified Purchaser vs. an Accredited Investor. Pension and endowment funds are typical examples in this category (i.e., sometimes referred to as super-accredited investors), with substantially loftier benchmarks than we see for individuals and businesses.

What is a “Sophisticated Investor” vs an “Accredited Investor”?

“Sophisticated Investors” lack a formal classification/qualifications and do not have the same investment opportunities that accredited investors have. Sophisticated investors are defined by the SEC as those who “have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” Generally, those who guide others in fiduciary matters are recognized as sophisticated investors, such as accountants, bankers and business owners.

Pros and Cons of Becoming an Accredited Investor

The positive gains of accredited investment opportunities make it worthwhile to many investors to go through the process to become formally recognized. Some of the pros include: 

  • Accredited investors have access to potentially lucrative investments that are not open to the general public 
  • High potential returns 
  • The opportunity to diversify one’s investment portfolio 
  • Late stage pre-IPOs (Initial Public Offerings), angel investing, hedge funds and commercial real estate are a few examples of exclusive investment opportunities. 

With higher potential returns comes higher risk. The cons are associated with the potential loss of capital: 

  • Some private offerings are highly speculative. It’s important that investors completely assess and understand the risks before signing on. 
  • Illiquidity: private investments, such as commercial or tourism real estate development, generally are longer term holds and may even have a lock-up period. 
  • Due Diligence: accredited investors are left to their own devices when conducting due diligence for a potential investment. It’s important that investment sponsors have a proven track record and demonstrate ethical and fair business practices. 
  • High Minimums: private investments require a much higher minimum investment.
  • High Fees: Some REITs for example, charge investors a waterfall of expensive fees, assuring their own profit while maximizing risk for investors. Conversely, InvestinKona.com sponsors charge zero fees to investors.

FAQs:

How long does it take to become an accredited investor?

If you obtain an advisor letter you can access quickly (or you have it in hand) as verification, the answer is almost instantly. Alternatively, if you have to go through all the options, it could take weeks. Online expert sites can help you condense the time substantially (outside of a registered advisor verification).

What are the benefits of becoming an accredited investor?

Becoming formally accredited allows you access to a range of private investment opportunities cut off from access to the general public. These include real estate, venture capital, and hedge fund opportunities (to mention a few) that don’t meet registration protocols.  

Kona Estates Fund II, LLC: An Exclusive Opportunity for Accredited Investors

Hawaii's iconic Kona single-family development over a massive tract of premier-class land stands out as an excellent real estate option for accredited investors. It brings the positive investment potential of lucrative returns while minimizing risk.  No financial leveraging is being used to develop the property and potential IRR rewards are over 25%, while also conferring significant investor tax advantages.

Moreover, the management team's experience and reviews are second-to-none. Exit paths are well documented and mapped out. You can invest in an asset category in the multi-millions of dollars with one or more units starting at only $100,000.