Are you ready to place capital into an investment, but first need to prove that you are an accredited investor?
Currently, the U.S. Securities and Exchange Commission (SEC) limits most real estate funds and private placements to accepting capital only from people who are verified to be accredited—according, of course, to their somewhat arbitrary definition.
So, what does the term accredited mean?
Simply put, being accredited means you are a “qualified” individual, as defined by the SEC. In theory, the SEC hopes that requiring you to meet certain standards will indicate that you are financially savvy enough to make sound investment decisions in less regulated markets.
There are two primary ways to qualify as an accredited investor. Once you choose your method to qualify, you will then need to have your documentation verified by a third-party.
Let’s dig into this process now.
Methods for Proving You’re an Accredited Investor
The first way is to qualify as an accredited investor is by financial criteria. If you want to qualify this way, then you’ll need to meet one of these standards:
- Having a net worth over $1 million either by yourself or in combination with your spouse (excluding your primary residence)
- Earning an income over $200,000 (individually) or $300,000 (combined with your spouse) for the two past years and expecting to do the same this year
The second way to qualify as an accredited investor is through professional qualifications. This way is less common, because it is more of a burden.
To qualify this way, then you’ll need to meet one of these standards:
- Having a general securities representative license (Series 7), an investment adviser representative license (Series 65), or a private securities offerings representative license (Series 82)
- Being a director, executive officer, or general partner (GP) of the company offering the investment
- Being a client of a “family office” that qualifies as an accredited investor
- Being a “knowledgeable employee” of the entity you want to invest in
Materials Required to Prove You’re Accredited
Of course, now that you understand how to qualify as an accredited investor, you’re going to need to prove it to others.
Typically, the company, fund, or entity that you want to invest with won’t be able to accept your money for investment unless you can prove your accreditation status.
To do this, you’re going to want to gather documentation. The type of documentation that you need will obviously depend on how you intend to qualify as accredited.
If you’re going to qualify by net worth, then gather items such as:
- Bank statements
- Mortgage deeds and end-of-year mortgage statements
- Stock brokerage statements
- Subscription agreements for any private placement investments or real estate syndications
- Evidence of cryptocurrency holdings
If you’re going to qualify by income, then you will want to gather your:
- W-2 statements
- 1099 statements
- Evidence of rental income, such as bank statements and leases
And if you’re going to qualify through professional qualifications, then you will want to gather:
- A copy of your professional license
- Evidence of your role as the director, executive officer, or general partner (GP) of the company offering the investment
- A copy of your employment agreement
Now that you know how to qualify as an accredited investor and have your documents in order, you need one more thing— which is someone other than yourself who can verify your accreditation status.
Thankfully, there three straight-forward methods that you can use to accomplish this.
These methods are to:
- Provide a letter from a certified public account (CPA)
- Provide a letter from a licensed attorney
- Use a third-party verification service
To help you better understand these options, I’ll describe how each of them works below.
1. Submit a CPA Letter
This method involves enlisting the services of a certified public account (CPA). After you engage the services of this person, they will go through your finances to ensure that you cleanly meet the accredited investor requirements.
If you already have a CPA who does your taxes, they should be your go-to choice. This is because they will already have a clear understanding of your annual income, and likely, your net worth as well.
If you aren’t working with a CPA, you can still hire one but it will require more of their time to review your financial situation starting from scratch.
If it makes things easier, you can also send them this letter and simply ask them to complete it on your behalf:
2. Submit an Attorney Letter
Another method for providing that you’re accredited is to seek out the services of a licensed attorney.
Like with a CPA, you’ll need to show your attorney the necessary evidence of your income or net worth. Once they’ve gone through documents, then they can draft a letter and send it directly to anyone who needs proof of their findings.
Be sure that the attorney you work with is someone who has experience in financial law or a related field. A lawyer who specializes in car accidents, for example, may not have enough experience to help you.
As with the CPA, you can make things easy by simply asking them to complete this form on your behalf.
3. Use a Third-Party Service
Finally, one of the easiest ways to prove you are an accredited investor involves using a reliable third-party service.
Two of the leading sites offering this service are VerifyInvestor.com or ParallelMarkets.com. Typically, you can expect to pay around $100 to have one of these services review your financial qualifications.
Personally, I think Verify Investor makes the process a lot easier to navigate than Parallel Markets, but feel free to make that decision for yourself.
The basic process here is that you submit your financial documentation to their user portal. Then, an attorney on their staff reviews your documentation.
If they determine that you meet the criteria to be designated as an accredited investor, then their staff attorney will issue you a statement to this effect.
Proving You Are an Accredited Investor
Now that you’ve learned all about how to prove you are an accredited investor, you’ll be able to access investment opportunities that many others can’t.
In some cases, this can make it easier to multiply your money faster, because you’ll get access to a wider range of financial offerings. I hope this is the case for you.
Did this article help you better understand how to prove you are an accredited investor? Let me know in comments below.