Most Americans are taught very little about financial literacy. Thus, the U.S. economy is one of the largest in the world, but America ranks number 14 among countries with the most financially literate citizens.
To gain wealth in America, you have to understand how to take advantage of wealth-building opportunities. One of the most effective ways to build wealth is through investing. However, there’s a major difference between the U.S. government’s definition of a “regular investor” and an “accredited investor.”
In order to have access to the very best investment opportunities—the ones available to the top 1%—you’ll need to be classified as an accredited investor. So how do you become one?
Learn the definition of an accredited investor and how to become one below.
What Is an Accredited Investor?
Most people were taught to save when they were little. When you received birthday money or a gift from grandparents, parents quickly reminded you of the value of savings.
Saving money is a responsible practice, but it won’t add to your wealth. To do this, you need to learn the art of investing.
Accredited investor status is the holy grail of the investment world. These investors stand out from the pack because they meet one of the following criteria:
1. Earned Income
To be classified as an accredited investor, your earned income must exceed $200,000 per year. If you are married, when combined with a spouse, your income must exceed $300,000 per year.
You must earn this income for a minimum of two full calendar years in order for it to count towards this requirement. The current year is not included in these two full years and your income for the current year should be expected to meet these same minimum requirements.
2. Net Worth
Another way to be designated as an accredited investor is through your net worth. Your net worth is equal to your total assets minus your liabilities.
Investors with a minimum net worth of $1 million, either on your own or with a spouse, are considered to be an accredited investor.
It is important to note that a primary residence doesn’t count towards your net worth even if you have equity in your home. This is because your house usually costs you money to live in, instead of making you money. Thus, it is considered to be a liability and not an asset.
An example of an asset could be income-producing real estate or anything else that can be sold for cash, such as stocks, bonds, certificates of deposits, or Bitcoin.
The median U.S. household has a net worth of around $97,000. While this number tends to increase as you age, this means that most Americans are far from being accredited investors.
Why Become an Accredited Investor?
A big part of why the rich tend to get richer and the poor tend to get poorer is that the rich tend to have access to better investment opportunities. The public generally can’t invest in hedge funds, private equity deals, venture capital funds, or other high-return deals because these private placements are limited to accredited investors only.
Unsurprisingly, these opportunities can give investors the chance to make hundreds of thousands (even millions) over a lifetime, so it is unfortunate that access to them is usually limited to the wealthiest individuals.
Most investments must be registered with the U.S. Securities and Exchange Commission (SEC) by a licensed broker before they can be sold to an investor. Accredited investors can bypass this rule.
If you want to increase generational wealth for your family, you’ll need access to investment opportunities that can improve your net worth. The largest opportunities for investment returns lie in high dollar investments.
In order to gain access to these investments, you’ll need to become accredited.
How to Become an Accredited Investor?
Ok, you understand now the importance of being an accredited investor, but how do you actually become one? First, there’s no course or certification you can earn that grants you accredited investor status once your net worth changes.
Second, there’s no federal agency monitoring whether investors are or aren’t accredited before they pursue a deal. Instead, companies selling investment opportunities that require accredited investor status must go through the process of vetting individual investors.
As proof of your financial status, companies will ask you to do one of the following:
1) Self-certify that you are accredited
2) Have your CPA certify you as an accredited investor
Why Does Accredited Investor Status Exist?
In theory, accredited investor rules prevent big companies from taking advantage of people who might not be savvy or able to rebound from a major financial loss. The SEC explains that accredited investor rules are in place to protect you.
However, this is rarely how it plays out in real life.
Instead, accredited investor requirements act to preserve the best investment opportunities for wealthy people, while excluding others from other accessing them. If the SEC really cared about protecting you, then you wouldn’t be able to say…gamble your life savings away in Vegas.
Methods to Become an Accredited Investor
There are two clearly defined ways to upgrade your status from a regular investor to an accredited investor, one related to net worth and one related to income.
1. Increase Your Net Worth
The first way to become an accredited investor is to increase your net worth by building up the value of your current investment portfolio. This means aggregating more money in your savings and retirement accounts.
Many real estate investors also build up their net worth by investing in single-family housing until they have enough collateral to purchase multifamily real estate. This is the approach that I have taken.
Multifamily real estate can easily earn an experienced investor an accredited status. Do your research to see which method of building your net worth works best for your skill-set. You could also start a business or get involved with microlending.
Finally, remember that creativity and grit are highly correlated with wealth building and there has never been a better time in history to create wealth quickly, so don’t get discouraged if you’re in the early stages of growing your net worth.
I started from nothing (actually, from six-figures in student loan debt), so no matter where you are now, I believe you can do it too!
2. Increase Your Income
The second way to become an accredited investor is more challenging for the average person. This way is to increase your annual salary.
Currently, the median annual salary in the U.S. is just over $60,000 per year. Unfortunately, this is a big step down from the $200,000 required to become an accredited investor.
For most people, increasing their net worth through investing is a more realistic way of becoming an accredited investor. However, some people with high paying jobs prefer to utilize this approach.
Remember to think beyond your salary at your job. To supplement your income, you can start a business or invest in someone else’s venture to bring in a bigger paycheck.
You can also marry a person with a high income to qualify via this approach. Just remember that when you’re married, your combined income must exceed a higher figure of $300,000 per year.
(*If you want to read the full federal code on how to become an accredited investor, then the “Electronic Code of Federal Regulations” is available here. It’s definitely long and technical, but interesting!)
Accredited Investor Rules
Most people don’t come from wealthy parents and we definitely aren’t taught ways of becoming an accredited investor in junior high, high school or college. However, there is a path forward that can empower you to take control of your financial health.
The first step is doing your research to learn what you can invest in with the time and money you have today.