How to Become an Accredited Investor: Eligibility, Pros & Cons

Are you a potential investor hoping to broaden your asset portfolio and invest in unregistered securities? 

Then you should aim to get an accredited investor status.

Once you figure out how to become an accredited investor, you’ll be able to capitalize on any private asset investment opportunity.

In this article, we’ll discuss who is an accredited investor, the criteria to become one, and the different legislation linked with accredited investors. 

We’ll also explore the pros and cons of being accredited, the investment opportunities, and a way to earn high returns from wines through Vinovest without getting accredited.

Who Is an Accredited Investor?

An accredited investor is any person or entity permitted to invest in private fund securities that aren’t registered with the Securities and Exchange Commission (SEC.) 

As an accredited investor, you must have the income, knowledge, or experience to withstand the risks associated with such unregistered securities. 

Accredited Investor vs. Qualified Purchaser 

A qualified purchaser is another entity allowed to invest in securities not available to the general public. 

Though both terms are usually used interchangeably, the requirements to become a qualified purchaser are stricter than those for an accredited investor.

The major differences between an accredited investor and a qualified purchaser are:

• Accredited investors can only invest in funds under Section 3(c)(1) of the Investment Company Act of 1940. 

Qualified purchasers can invest in both 3(c)(1) and 3(c)(7) funds.

• Funds covered under the 3(c)(1) section of the Investment Company Act allow only 100 accredited investors. For fund sizes less than $10 million, 3(c)(1) allows 250 accredited investors. 

In contrast, a 3(c)(7) fund allows up to 2,000 qualified purchasers. 

How to Become an Accredited Investor

To become an accredited investor, you must fulfill the annual income/net worth (excluding your primary residence), knowledge, or experience requirements. 

Though no agency officially approves an investor’s accreditation, the SEC requires any organization dealing with a qualified investor to verify the person’s accredited investor status. 

Your accredited investor status can be verified through financial (income/joint income and net worth) and knowledge tests. 

Let’s take a closer look at each of these accreditor investor qualification requirements:

1. Financial Tests

One of the primary accredited investor requirements is the financial situation, and that can be assessed through either of these tests:

• Income Test: If you’re an individual investor with a pre-tax annual income of over $200,000 (or joint income of $300,000 with your spouse) in the past two tax return years, you can qualify as an accredited investor. 
• Net Worth Test: Any individual investor who has over $1 million net worth, excluding the value of their primary residence, can become an accredited investor.

2. Knowledge Tests

The “knowledge” and “professional” accredited investor requirements are:

• Professional Certification: You can get an accredited investor qualification if you hold some professional certification or designation. These qualified investor certifications include Financial Industry Regulatory Authority (FINRA) licenses like the Series 7, Series 65, and Series 82. 
• Insider Status: If you work for an entity that offers non-registered investments, you are known as a ‘knowledgeable individual’ and can attain accreditation and insider status. 

3. Alternative Accredited Investor Entities

Other entities that can qualify for the accredited investor status under Section 501 of Regulation D are:

• Banks
• Registered Investment Advisor (RIA) firms
• Employer-sponsored retirement plans
• Commercial real estate firms
• Limited liability companies with $5 million in net assets
• SEC- and state-registered investment adviser
• Exempt reporting advisers
• ‘Family offices’ with at least $5 million in net assets and their ‘family clients’ defined under the Investment Advisers Act

What Are the Different Laws Associated with Accredited Investors?

Given the risks associated with investing in unregistered, private fund securities, you’ll be able to invest in them only if you have enough resources, knowledge, and experience. 

For better control, the SEC defined the term accredited investor in Regulation D of the 1933 Securities Act.

Following the 2008 financial crisis, President Obama enacted the Dodd-Frank Wall Street Reform and Protection Act in 2010. 

The Act denied an investor from adding the value of their primary residence as part of their net worth to qualify for the accredited investor status.

Lastly, in August 2020, the SEC amended the eligibility requirements for accredited investors. Today, it includes professional knowledge, certification, or experience besides the existing net worth and income criteria. 

The amendment also added new entities to the accredited investor definition, such as:

• State- and SEC-registered investment advisers
• Individuals with Series 7, Series 65, and Series 82 licenses 
• Indian tribes, governmental bodies, funds, and entities with over $5 million funds set up under the laws of foreign countries for investing in the securities offered

What Are the Pros and Cons of Being an Accredited Investor?

Becoming an accredited investor comes with its fair share of benefits and drawbacks. The top advantages of becoming an accredited investor include:

• Access to investment opportunities unavailable to non-accredited investors
• Access to a restricted investment option
• Improved returns on your investments
• Greater diversification of your portfolio
• Ease of meeting the prerequisites if you have enough net worth or income

However, being an accredited investor also has disadvantages like:

• Investing in high-risk asset classes
• Requiring a higher amount of minimum investment capital
• Higher performance fees
• Extended periods of capital lock-up
• Possibility of qualifying as an accredited investor without enough experience or expertise

What Are the Investment Opportunities Available for Accredited Investors?

Accredited investors have access to several investment opportunities elusive to the non accredited investor. 

These investments are speculative and include:

• Venture capital fund or angel investment in a startup 
• Unregistered securities (or private placement)
• Private equity fund assets
• Hedge funds
• Commercial real estate investment funds, and so on.

But: 

These opportunities can be high-risk and have higher income, knowledge, and experience requirements (introduced by the SEC under Regulation D of the Securities Act.) 

However, what if there was a way to earn a handsome income without the hassle of becoming accredited or gaining specialized knowledge? 

Vinovest is a wine investment company that enables you to build a portfolio of high-return wine bottles.

The best part?

You don’t need to have any special accreditation or wine knowledge to tap into this investment opportunity.

Let’s see how this investment option works!

Build a Profitable Wine Portfolio with Vinovest

Wine is an alternative investment just like private placement sales, private fund, mutual fund, and venture capital fund assets. 

However, the main advantage of wine as an asset is that you do not need to be an accredited investor to start a wine portfolio.

The several benefits of wine investment include:

• Accessibility: While you can access high-return, private fund securities only by becoming an accredited investor, fine wine has no such limitation. 

Investing in wine is as simple as signing up on the Vinovest platform and setting up your profile with a few easy mouse clicks.

• Inflation Protection: Unlike most hedge funds or real estate investing, fine wine is an inflation-proof asset since the price of fine wine typically increases with inflation.
• Recession Protection: Since fine wine has low correlation to the market unlike a conventional asset like a mutual fund, it delivers excellent returns even during recessions. 
• High Returns: Wine is an alternative investment that has yielded 13.6% annualized returns over the past 15 years, much higher than stocks and bonds.
• Stability: Fine wine increases in value with age. If you hold on to your labels long enough, you’ll have a secure asset that increases steadily in value in the long term. 

If you’re a potential investor interested in building a profitable portfolio of high-value labels, you should check out Vinovest. 

Vinovest is an AI-driven wine investment platform that lets you buy, store, and sell excellent wines from around the world. Its expert investment adviser team will guide you in picking the best possible wine labels.

Invest in Wine to Earn Handsome Returns Without Becoming an Accredited Investor

An accredited investor might have several benefits over a non accredited investor, including exclusive access to lucrative securities. 

So, if you aren’t a high net worth individual or don’t possess the specialized knowledge to be accredited, you’d have fewer opportunities to earn good profits.

But if you decide to invest in wine, you can earn stellar returns without being accredited.

So, sign up with Vinovest today to build a high-performing portfolio of world-class wine labels.