I Just Became An Accredited Investor... Now What

If you recently became an accredited investor or on your way toward becoming one, here’s what you need to know about this classification, what investment opportunities come with it, and the leading alternative investment categories that are now open to you.

How to Become an Accredited Investor

Just over a year ago the Securities and Exchange Commission modernized the definition of an accredited investor, opening up a world of new opportunities to a broader group of people.

In the past there were only two ways to become an accredited investor. You either had to have made (and continue to make) a yearly income of $200,000, or $300,000 for married couples, or you had to have a net worth of more than $1 million between you and your spouse, not including the worth of your home.

The SEC eased these rules in September 2020, making it easier for a greater number of people to get in on exclusive investment opportunities. The new requirements do away with financial thresholds as the only qualifiers: now you can qualify as an accredited investor if you’re financially savvy or have certain professional certifications, expanding the qualifications beyond mere financial figures, or if you hit certain financial criteria due to a combined spousal net worth or income.

Although the number of accredited investors was once fairly slim, these new rules will likely cause this number to rise. The growth in accredited investors has trended upward every three years from 2013 to 2019, a year before the modernized SEC definition.

Credit: DQYDJ

This trend should continue through the end of 2021 and beyond. Much of this growth is thanks to a greater number of accredited investors who qualify for reasons other than net worth. Now that qualifications are easier than before, we can likely anticipate a surge in accredited investors once 2021 data is made available.

Aside from meeting the SEC’s qualifications, there are no other steps you need to take in order to get set up as an accredited investor. You won’t get a piece of paper stating you’re qualified, nor have to pass any kind of certification. If you’re an accredited investor by way of having an SEC license, you’ll need to stay in good standing and renew your license as necessary. The investment provider has to do its own due diligence to verify that you’re qualified. Thus, as long as you meet the requisite financial qualifications, you’re good to go.

What it Means to be an Accredited Investor

Accredited investors have access to a broad range of investment opportunities that are not accessible to the general public. These opportunities are known as Regulation D investments (or Reg D for short). Reg D is a Securities and Exchange Commission mandate that allows for the sale of equity or debt to investors without having to register them with the SEC.

For accredited investors, this means opportunities in more complex investment categories. These unregistered investment opportunities can give you the opportunity to get in early on emerging startups, private equity firms, real estate deals, and a host of other asset types that aren’t on offer for the non-accredited. Most come with higher interest rates than you’d get through a publicly traded security, which can avail you to potentially higher upside for your investing dollar. You typically need to hold these assets longer than publicly traded securities, however.

What Opportunities Accredited Investors Have Access To

Here are a few of the investment types that are available to accredited investors.

Private equity funds

Private equity funds seek to gain ownership stakes in private companies, fueled by the private equity fund's investors. The primary investors for private equity funds used to be pension plans, college endowments, and ultra high net worth individuals. But recent SEC rule changes expanded the number of investors who can invest in private equity.

When you invest in a private equity fund, you can expose yourself to greater returns than you’d otherwise see with stocks or mutual funds. On the other hand, investing in private companies often means having less data to work off of. Private companies aren’t required to disclose information like public companies. Many provide substantial information to potential private equity investors, but the opacity of this sector may make for a steep learning curve for newly minted accredited investors.

Crowdfunding

Crowdfunding opportunities can help accredited investors get in on groundbreaking startups and companies. The SEC also relaxed rules on how much crowdfunded investments companies can take in a funding round. The Commission’s previous cap was $1.07 million every 12 months, but now businesses can raise $5 million through crowdfunding over the same timespan.

There are a variety of crowdfunding platforms that make it easy to get started as well, which can be a more appealing option for accredited investors who may not want to dive into the deep-end with these newly unlocked asset categories.

Real estate investments

Investors have long been able to invest in real estate, typically in the form of residential or commercial properties. Bigger, more complex deals weren’t very accessible, however. These tend to yield bigger returns, as well as bigger investments, which made them fairly exclusive and out of the range of your individual investor.

FinTech platforms make it easier for individuals to invest in bigger deals. Instead of having to make major financial commitments or do the due diligence to seek out compelling opportunities yourself, individuals can invest through these platforms and do the majority of the heavy lifting to bring growth opportunities to the table.

Farmland investing

Farmland investing is the oldest asset class in the books, but a newly accessible opportunity for accredited investors thanks to the rise of crowdfunding platforms like FarmTogether.

Although farmland has long been a staple of the ultra-wealthy, insurers, and pension funds, its value proposition is the same for smaller, individual investors. Farmland can serve as a hedge against volatile market conditions, ties into underlying commodity price increases, and has anticipated return rates that are significantly higher than your typical treasury bond; it has appreciated every decade since the 1990s, has a track record of retaining its value, and enjoys a negative correlation with the stock market.

Asset-backed investments

Asset-backed securities are similar to bonds (or notes) that pay you a fixed income rate on a regular basis until it matures. Instead of a Treasury bond, where you would invest in U.S. treasury debt in exchange for interest, asset-backed securities are collateralized through loans, leases, credit card balances, and outstanding invoices.

These investments can create recurring, passive income in ways that are similar to corporate bonds or bond funds. Asset-backed securities range in terms of risk: their origins come from debt that’s sold from one lender to another. Some kinds of debt, such as subprime mortgages, run a greater risk of not being repaid. Others, however, pool together more stable forms of debt, so be sure to do your homework first.

Exploring Farmland Investing

Farmland investing offers a compelling option for first-time accredited investors due to its track record of value retention and appreciation. Since the mid-1990s, farmland as an asset class has generally increased in value, with the average acre valued at $3,160 in 2020, consistent with 2019 levels.

Like many alternative investments, farmland typically requires a long-term perspective, though hold periods can vary depending on the specific opportunity. Farmland has a history of delivering returns that often outperform bonds and demonstrates lower volatility compared to other alternative assets, making it a strong candidate for investors seeking stable, long-term growth.