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What Is an Accredited Investor and How Do You Become One?

When it comes to buying stocks and bonds, pretty much anyone can invest. As long as you’re over the age of 18 (or 21, in some states), not trading on inside information, or not investing as part of a conflict of interest, you can be a part of public markets whether you have $1 or $1 million.

Yet when it comes to more complicated investments, not everyone can partake. Certain investment vehicles — including those on Percent — are only available to a class of investors legally defined as Accredited Investors. These investors have the explicit permission from regulatory bodies based on a narrow set of criteria to invest in certain types of investments in private markets.

But who can be an accredited investor? Better yet, why are accredited investors a thing in the first place?

What exactly is an accredited investor?

After the Great Depression, the U.S. Congress passed the 1933 Securities Act to prevent another similar market crash. This act required investors to have a better understanding of what they were investing in, while prohibiting misrepresentations, fraud, and deceit in security sales. Congress assumed this law would protect the “regular” investor.

Private offerings — those outside of the public stock exchanges — were exempt from securities laws, which created some issues. The Supreme Court ultimately determined that for an investor to be eligible to participate in a “private offering”, they had to have sophisticated financial knowledge to evaluate the investment, and the financial capacity of suffering a total loss. The Securities and Exchange Commission (SEC) eventually adopted rule 501 of Regulation D, which formalized who could invest in private offerings and defined the term “accredited investor” — a term that was later updated in 2020.

Who can be an accredited investor?

An accredited investor is anyone who meets any of the following criteria:

  • Investors with earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and expects to meet the same benchmarks in the current year.
  • Investors with a net worth over $1 million, either alone or together with a spouse (excluding the value of the investor’s primary residence).
  • Investors with certain professional certifications, designations, and/or credentials, including Series 7, Series 65, and Series 82 licenses while qualifying as “natural persons.” (Investors with other licenses are to be considered and added in the future.)
  • “Spousal equivalents,” or spouses of accredited investors who pool their assets along with said investors to meet the previous net worth and/or income requirements for accredited investors. (Eg. If you are married to an accredited investor and share monetary resources, you are now also an accredited investor.)
  • Those who are “knowledgeable employees” of a private fund.
  • Limited Liability Companies (LLCs) and Family Office entities with $5 Million assets under management. SEC- and state-registered investment advisers (but not reporting advisors) of these entities can also now be considered accredited investors.
  • Entities including Native American tribes, governmental bodies, funds, and entities “organized under the laws of foreign countries” with investments over $5 million — as long as they were not formed solely to invest in a specific accredited investment.

For instance, if you have a net worth of over $1 million (not including your primary property/residence), made $200,000+ a year for the last two years, or have your Series 7 license, you can make investments as an accredited investments.

There are many other qualifications (as you can find above), and the SEC plans on adding more in the near future.

Who can’t be an accredited investor?

Seeing as these are incredibly specific criteria, if you don’t meet them, you can’t make accredited investments. This unfortunately means you can’t invest on Percent.

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