According to US SEC laws, only accredited investors can invest in unregistered investment vehicles. Such investment opportunities may arise in private equity funds, venture capital firms, hedge funds, etc.
It turns out that many of the most interesting investments in the realm of IEOs, STOs, and ICOs are also only available to this privileged class of investors.
Why Can Accredited Investors Make Money Where the Little Guy Cannot?
The SEC requires providers of securities to register their offerings with the SEC. Only in this way can authorities offer investors legal protection. The law observes some exemptions, however. One of these exemptions takes aim at accredited investors.
The Problem: What Is So Special About Accredited Investors?
To gain access to the mentioned IEO, STO, and ICO-based investment opportunities, you need to become an accredited investor. How do you do that?
There are three paths to this coveted status and none of them involve certification from an agency.
- If your individual income has exceeded $200k/per year, for at least the two most recent years, you automatically become an AI. The same goes if your joint income with your spouse exceeds the $300k/year mark. You will probably need to prove that you can maintain the same income level for the current year as well.
- You are also AI-eligible if your individual net worth, or your joint net worth with your spouse, is north of $1 million.
- If you hold some type of insider position with the entity issuing the securities, you are also an AI.
It is the responsibility of the security-issuing entity to verify and approve your accredited investor status.
The Solution(s)
For someone with a low income and low net worth, this is quite the conundrum.
Fortunately, there are a few ways to achieve accredited investor status without being rich.
- Have a spouse whose income is large enough to fulfill the $300k joint income requirement. Your personal income is not a factor in this case.
- Be aware that the value of your primary residence does not count toward your net worth. Neither do the liabilities carried by your primary house (with some exceptions). Responsible for this inconvenient twist of the law is the Dodd-Frank Act, passed in 2010.
- The Trump Administration is working to undo Dodd-Frank. There may thus be a day when primary residences will once again count toward net worth, in regards to AI status.
- If you cannot personally fulfill the requirements posed by the law, you can become a member of an entity that does. In this regard, it makes sense to study the list of legal definitions provided by the SEC.
Small Business Investment Companies might provide a workable path to accredited investor status. The same goes for employee benefit plans and many other institutions and entities covered by the definitions.
Even if you are the general partner of a general partner of the securities issuer, you are eligible for AI status.
There is plenty of room to maneuver here legally and there are plenty of open doors.
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