Most people have heard of investors, but accredited investors are a slightly different animal. Accredited investors can be natural persons or entities. Generally, as it pertains to natural persons, they must have yearly income exceeding $200,000 individually, or $300,000 with a spouse. Alternatively, natural persons can also be accredited investors if they have a net worth, either individually or with their spouse, totaling $1 million or more. For the income test, the thresholds must have been met for the two prior years, and there must be a reasonable expectation of achieving such thresholds in the current year. For the net worth test, it’s just a snapshot in time test. Being an accredited investor comes with a great number of benefits, but there are also plenty of drawbacks to consider and plan for if you plan to use your accredited investor status to actively invest.
The Benefits
When you are an accredited investor, you gain access to vast array of investments. The sky’s the limit! You can choose to pour your money into hedge funds, lend a hand to startups or anything else you can dream of. Some of these deals can offer you extremely large potential for profit that ordinary investors who are not accredited are prohibited from investing in. For most investors, this factor generates the most appeal. Having this kind of money in the investment world will also put you in touch with some incredibly high-ranking contacts, including powerful business owners who can help you make even better investment choices. So if you can pass the accredited investor test, there are certainly a lot of benefits. As it is often noted, “it takes money to make money”, and “the rich get richer”.
The Drawbacks
You get what you ask for. While you may have access to great deals, not all of them will end up being great deals. It’s easy to invest your fortune in a great number of deals that end up losing money. The accredited investor test for natural persons speaks only to income or wealth, and not to sophistication. Plenty of accredited investors have become non-accredited due to poor investments. Additionally, when you are an accredited investor, others may target you for investments, making it harder to say no. If you’re uncomfortable with investing in any deals, do the smart thing and just pass.
For the majority of investors out there, the benefits of being accredited vastly outweigh the risks. Be sure to conduct as much research as you can before you part with your hard earned money.
