Accredited Investors & Investing

Many tech employees qualify as accredited investors and don't even know it. That's what happened to me! The status of being accredited isn’t only awarded for a person’s net worth, but also for how much you earn, including bonuses, RSU (Restricted Stock Units), and so on. 

Only accredited investors are allowed to trade securities that aren't registered with the Securities and Exchange Commission (SEC) or the state-level regulator.

Many tech employees are compensated well, both in salary and in equity, but they sacrifice a lot for that money. I know, because I've been a tech employee for most of my career. It was after I went through an IPO that I realized I needed to understand the broader world of investment so that I could now make my money work for me. 

After an immense amount of research, I did find a way to make my money work for me. This journey and ultimate success led me to start Wealthward Capital so I could help other tech employees do the same. 

The secret to making your money work for you lies in the opportunities that exist for accredited investors, such as certain real estate investments.

If you report $200,000 or more on your W-2 form, or you and your spouse (or spousal equivalent) report more than $300,000 per annum, you very well might be accredited.

America's wealthiest families invest 50% of their assets in alternative investments. These are investments that don't fit into the usual investment categories of equity, debt, and cash, many of which are only open to accredited investors.

Wealthward Capital focuses on alternative investments specifically targeted at the high-earning tech employee. Our basic philosophy is that all tech employees need passive income.  A passive income investment needs to give you regular, hard cash every month or every quarter. And that cash needs to be cash in addition to the initial principal invested. An "investment" that pays you back what you paid into it initially isn't an investment—it's a savings account. 

Just a quick heads up that I'm not a financial advisor and this isn't financial advice! (But my money does work for me and I know it can work for you, too.)

FAQs about Accredited Investors

What qualifies an individual as accredited?

In the USA, the definition of an accredited investor is a person who has over $1 million in net assets (excluding your primary residence), or someone who has earned $200,000 (or jointly $300,000 with a spouse) in the two immediately preceding years.

The $1 million net worth, excluding the primary residence, can also be counted jointly with your spouse or spousal equivalent.

Another name for people with $1 million in assets is high net worth individuals (HNWIs).

According to the accredited investor definition, individuals who meet any of the following criteria are also considered accredited:

  • Knowledgeable employees who work for an investment company. The definition of "knowledgeable person," which would apply to knowledgeable employees, is specified in the Investment Company Act of 1940.
  • Individuals who hold certain professional certifications and licenses authorizing them to do such things as offer securities for sale or provide financial advice to clients. They are considered accredited because of their professional knowledge of investment topics.

The entire reasoning behind the concept of an investor who is accredited is to reduce risk for anyone who does not have sufficient knowledge or capital to be exposed to high-risk investments. 

The accredited investor definition does not apply only to individuals, and there are additional criteria to categorize an institution as accredited.

With the high wages, bonus and equity compensation that many tech employees receive, they can easily meet the accredited requirement.

Technology employees also can become accredited investors through the net worth requirement. Many tech employees become millionaires overnight after an IPO. It's crucial to know what to do with that wealth once you have it.

Why does the Securities and Exchange Commission or SEC require accreditation status?

The Securities and Exchange Commission was formed after the stock market crash of October 1929 to protect investors. In light of that, the status of being accredited is enforced to ensure that inexperienced investors don't get burned when investing in non-registered securities.

In short, the accredited investor definition was created to ensure that potentially high-risk investments were only open to people and organizations that had a risk-tolerance for them.

Many of the investments that are open only to accredited investors require large minimums to enter them, as well as a long-term hold. Someone with a low net-worth might not be able to withstand the resultant loss in cash flow that a large investment could cause in the short term, not to mention any losses from a market downturn.

Private placements are completely open to someone with accredited status. A private placement is a non-public offering of securities or debt instruments. Each of these placements can only accept a certain number of non-accredited investors.

These placements don't need to be registered with the SEC and so are exempt from all of the obligatory filings that registered investments must go through. The lack of filings means that private placements might be less transparent than is comfortable for non accredited investors.

Hedge funds are a typical example of this. Many of them don't disclose exactly what makes up their portfolio, and they also invest in high-yield unregistered securities, which gives them a competitive advantage. But the lack of transparency can make them riskier—witness the huge Ponzi scheme run by Bernie Madoff under the guise of an extremely high-return hedge fund.

A private fund will also typically only accept accredited or qualified investors. A private fund is subject to much fewer regulatory requirements than other types of funds.

What qualifies an entity as accredited?

In addition to the qualifications for individuals, there are also accredited investor qualifications for entities. These are:

  • Any Business Development Company (BDC) or organization that has assets over $5 million is considered an accredited investor. A BDC is a company that invests in small- to medium-sized businesses or in distressed businesses. The BDC often sells shares in the open market.
  • If all of the equity owners of a legal entity are accredited then the entity itself will be considered an accredited investor.  For example, Wealthward Capital runs an ATM fund of funds investment where every investor involved is an accredited investor. That automatically makes that fund an accredited investor. Our ATM fund can then invest in much larger investments because of its accredited status. (A fund of funds is a pooled investment where a fund invests in other funds instead of directly in stock.)

Wealthward Capital's wide range of high-yield investments are open to both individual and institutional investors who are accredited. 

How much money do you need to be an accredited investor?

To be considered an accredited investor, you need a net worth of $1 million or a salary of $200,000, or joint salary of $300,000 or more, for the immediate previous two years.

IMPORTANT: It is not only your salary that gets counted but also any bonuses or other tax-deductible wages reported on your year-end W-2. This is why so many tech employees are qualified as accredited investors and don’t even know it!

The total assets summing up to $1 million cannot include the person's primary residence. The reason for this is because your primary residence is not liquid, and there is usually large loan or mortgage to offset it. The SEC also doesn’t want you to put your home at risk to invest.

People with certain professional certifications don't need to meet the financial requirements to be considered accredited.

How long does it take to become an accredited investor?

To reach accredited investor status, you must meet the salary requirements for the last two calendar years, either individually or with your spouse. You must either meet the requirements individually for two years, or with your spouse for two years, but never a mix of both.

For example, let’s say your W-2 wages sum up to $250,000 in Year One. But then your circumstances change, you get a new job, and your earnings drop to $180,000. Your spouse was not working in Year One, but also got a job in Year Two, and his/her wages are now also $150,000. Although you qualified in Year One (personal earnings over $200K) and also in Your Two (joint earnings over $300K), you would not be considered accredited because it must be either $200K of your personal earnings for two years, or joint earnings of $300K for two years, not a mix of both.

The net worth requirement does not have a time limit. So long as you meet this requirement, you are considered an accredited investor. It is expected that you will maintain the same income level for in subsequent years.

Determining whether someone is an accredited investor is actually up to the company selling the investment, not you as the individual. The company offering you the investment must perform its own due diligence to determine your status. 

Is it good to be an accredited investor?

Being an accredited investor gives you a financial edge. An accredited investor is able to invest more wealth due to a stronger financial position, and can also access many other financial products that non accredited investors are not allowed to invest in.

These additional investments include:

  • Private equity funds
  • Hedge funds
  • Real estate syndications
  • Venture capital firms
  • Private equity real estate
  • Derivatives contracts

An accredited investor can therefore have a much more diversified financial portfolio because they can invest in private funds that are not available to those who are not accredited.

Having an accredited investor status is a requirement for many types of high-yield real estate investments.

What is the difference between a qualified purchaser and an accredited investor?

A qualified purchaser is a person or family business that has at least $5 million invested. Qualified purchaser is a status measured on the size of investments, not on net worth. By definition, all qualified purchasers are already accredited.

Some investment funds seek only qualified purchasers for their investments. And there are also regulations in place that close certain investments off to investors who are not qualified investors, because of the extremely high risk involved in these investments.

Can you lose accredited investor status?

You can lose accredited investor status if your net worth or your earnings suddenly drop. If you hold certain professional financial qualifications, you can lose the status if your certifications are invalidated.

Losing your status won't affect any investments you are already involved in, but it will affect your options moving forward as you will no longer have access to accredited investments.

How many accredited investors are there in the United States?

Precise figures are difficult to estimate, but we estimate approximately 14 million households in America that qualify as an accredited investor based on household annual income level.

This does not account for individuals with a net worth of $1 million or more, or institutional investors. These would qualify as accredited investors under different criteria in the definition.

The SEC has a questionnaire it sends out regularly to determine the status but I was not able to discover if these results are published publicly. Estimates of the number of investors who are accredited are usually put out by market research projects or firms.

We unfortunately don't have figures for the quantity of accredited investors based on other determiners such as certifications designations or credentials.

How much can an accredited investor invest?

There is no limit to how many dollars an investor can invest in a Regulation D 506(c) offering. But there can indeed be limits imposed voluntarily by the investment itself. This is usually to prevent any single investor holding a controlling interest in the investment.

Regulation D refers to Regulation D of the Securities Act of 1933 regulation that regulates private funds. Regulation D essentially allows private companies to raise funds through equity and debt offerings without having to register these with the SEC—known as unregistered investments.

Rule 506(c) allows companies to perform general solicitation for their investments provided that all investors are accredited investors at the time they pay into the investment. 

How do I prove accredited status?

You can prove your accredited investor status to the company offering you securities by providing a letter from your accountant, tax filing documents, pay stubs, bank statements, financial statements, or any other official document that proves you meet the necessary requirements.

The easiest way to prove you are an accredited investor is to get a letter from your accountant, attorney, or other tax professional.

The SEC does not carry out accredited investor certification or validation. It is the duty of the investment firm that is offering you the securities to ascertain your status. They will let you know what they need, to prove satisfactorily to themselves that you meet the requirements.

Do accredited investors get higher returns?

Accredited investors have access to potentially higher-yield investments but this does not automatically guarantee them a higher return. There are risks involved with all investment types and asset classes. A rule of thumb is that higher risk investments can lead to better returns.

America's wealthiest families and individuals are waist-deep in alternative investments. These investment types are considered high-risk, but HNWIs invest in them because they do offer such steady gains.

The returns from alternative investments are often much higher than for Exchange Traded Funds (ETFs) or Mutual Funds. 

Wealthward Capital's real estate investments can bring in as much as 6% to 10%+ cash on cash returns paid monthly or quarterly. These returns are some of the best in the industry.

How do accredited investors make money?

Accredited investors have access to a much wider range of investment opportunities to make money. These include real estate syndications, hedge funds, private equity real estate, and more.

Alternative investments provide some of the most flexible types of investment strategies around because they do not need to follow regulations so strictly. Such investments are often closed to non-accredited investors.

What are unaccredited investors?

Anyone who does not meet the accredited investor criteria is considered an unaccredited investor, or a non-accredited investor. That means the person does not have either the net worth or the required knowledge to be exposed to the potential risk available in high-yield investments.

The crowdfunding model is a great opportunity for unaccredited investors because it has created many opportunities for people who don’t have the capital required to invest in larger projects. 

Can you self-certify as an accredited investor?

If you are investing in an offering provided under Rule 506(b) of the Securities Act of 1933, you will be able to self-certify to determine accredited status. If the offering is being provided under Rule 506(c), the company offering it must perform due diligence to verify your status. 

All of Wealthward Capital’s offerings are provided under Rule 506(c) which means that we must verify your accredited status. We can do this through primary documents such as pay stubs or tax return filings, or with an official letter from your attorney or accountant. 

We also require a minimum of $25,000 for investing in our Real Estate Syndications.

Is there a higher accreditation than an accredited investor?

A Qualified Purchaser is someone with at least $5 million worth of investments. Every qualified purchaser is automatically also an accredited investor but every accredited investor is not necessarily a qualified purchaser. 

Also, an accredited investor might have a net worth of over $5 million but not have all of it tied up in investments. That would automatically disqualify them from being called a Qualified Purchaser, even though their assets might be higher than other Qualified Purchasers’ assets.

Do accredited investors benefit from FP&A?

Financial Planning and Analysis (FP&A) is the practice of planning, budgeting, and analyzing an individual or business’s financial status to determine the best possible way forward for their wealth. 

FP&A is an especially vital activity for accredited investors so that their wealth does not devalue as a result of inflation. Investing in the types of high-yield investments that Wealthward Capital offers is usually a part of every accredited investor’s FP&A. 

What are sophisticated investors?

Not all sophisticated investors are accredited. A sophisticated investor is simply someone who has shown extensive knowledge of financial and business affairs. Sophisticated investors sometimes guide those who are accredited. 

The levels of certification for investors are:

  1. Non-accredited
  2. Sophisticated investors
  3. Accredited
  4. Qualifies investors

Each level has the right to invest in progressively riskier projects. 

In certain offerings, sophisticated investors are allowed to participate, such as in 506(b) offerings, however, Wealthward Capital deals solely in 506(c) offerings so all our investors need to be accredited. 

If you are accredited and a tech employee, we invite you to have a look at Wealthward Capital’s high-yield investment opportunities that are designed to make your money work for you.