Can Anyone Be An Accredited Investor? The Government Can’t Tell

One of the questions I asked in my accredited investor post is whether the current definition of accredited investor is fair or not.

61% of you voted that the Securities And Exchange Commission (SEC) should not dictate who can and cannot invest in private offerings.

Only 31% of you said the definition is currently fair, while the other 8% voted the SEC should raise the income and net worth limits.

As expected, some people shared their frustration in the comments section.

Can Anyone Be An Accredited Investor? Reader Feedback

Beth writes,

“I am not familiar with that term here in Canada but I was recently rejected for something I wanted to invest in because the company set terms for investors that I could not meet. It is a farmland REIT and investors must make $125,000 each year with the expectation that they will make that in the coming years and that they must have a net worth in excess of $400,000.

Very frustrating to be barred from solid investments. People must feel the same about the accredited investor title.

I will have to start buying lottery tickets if I want to hit accredited level.

The company I was interested in investing with, Agcapita, sells units in $5,000 blocks. I could easily manage that but I am still not welcome.

I spent an entire day ranting to family and coworkers and I felt a lot of resentment towards the company and the 1%. I am over it now but this is a very sound investment and I am stuck outside with my nose pushed up against the glass looking in feeling like the best investments are being kept from lower income people like me.”

Jack writes,

“Living and working in silicon valley, I’ve had several opportunities to invest in friends or colleagues startups. However, not being an accredited investor, I’ve had to pass.

It’s incredibly frustrating knowing the tech and the people but not being able to share in their success.”

We know that the wealthy tend to get more access to everything – politicians, elite private schools, tax experts, better health care, more private deals, etc. Life isn't fair and it's easy to resent the rich. But let me tell you something that happens often in accredited investor land that may surprise you.

Anyone Can Be An Accredited Investor With A Missing Verification Process

When I invested in a particular private equity investment a long time ago, I had to fill out a form and check a box saying I was an accredited investor. Since the definition hasn't changed in 30+ years, I still had to earn over $200,000 or have a net worth of over $1 million dollars. That particular year wasn't a great year for bonuses and my W2 was definitely under $200,000. I also don't think I had a million dollar net worth yet.

Despite not technically being an accredited investor, I checked the box saying I was and proceeded to invest $75,000 into the company. My rationale for saying that I was an accredited investor was basically what 61% of those who filled out my survey felt: the government shouldn't dictate what I can and cannot invest in.

I wanted to help my friend build his company and nobody could stop me from trying to participate. Furthermore, I had a strong belief that I would eventually become an accredited investor if I continued with my career in finance.

Not Exactly Accredited Yet Before Investing

I've since talked to a dozen people about their first accredited investor investment and they all said they were either not accredited or borderline when they made their initial investments. Nobody I know has ever been penalized because they technically weren't accredited investors at the time of investment.

We'd like to think the SEC established the accredited investor definition 30+ years ago to protect individuals from losing lots of money in private, illiquid, and potentially higher risk investments (not if you invested in Uber!).

Lots of people became accredited investors due to activities that had nothing to do with investing in the financial markets. But one of the big reasons for the accredited investor self-approval process, as the Financial Samurai community has wisely pointed out, is that the offering entity also wants to be protected.

Imagine if the next “hot deal” was open to everybody. You can easily see some people who might not have a lot of money invest all they have for the chance of getting rich. Greed is a very powerful force, especially during a frenzy. If the investment goes south, the investment offerer doesn't want to receive backlash from people who can't take the financial hit. By self-accrediting, the investor essentially acknowledges that they have enough money to be eligible for the investment. Therefore, those who falsely self-accredit don't have much recourse.

The government doesn't have an accredited investor system in place to police everybody who wants to invest in a private offering.

Always Invest Within Your Means

The only way to never lose money is to never spend or invest any money. If you are truly an accredited investor, you've begun to focus more on capital preservation. Let's say you've been able to accumulate a $2 million dollar net worth excluding your primary residence after 35 years of work.

The last thing you want to do is shoot for a risky investment that may return 50% or lose you 50%! If you get down to $1 million by investing in something sour, you've got to make a 100% return just to get back to even.

I'm not telling people to say they are an accredited investor if they really aren't by the government's definition. I'm just letting folks know that I've never heard of the government punishing someone for saying they are an accredited investor when they aren't. The only way I can see the government slap you in the face is if you are defiant enough to go after the investment offerer, despite knowing all the risks, and saying you had the money, even though you did not.

People who make over $200,000 a year or have over a million net worth shouldn't gain preferential access to alternative investments over people who have less. If Yale University's ~$25 billion dollar endowment has a 50% alternative investments target allocation, why can't regular investors partake in just a 15% allocation towards alternatives? Surely the importance of growing an individual's nest egg is equally as important as growing an endowment.

Invest within your means. Invest in what you know.

Note: The next step up from accredited investor is “Qualified Purchaser.” QP basically states you need to have more than $5 million in investable assets to participate in a particular private investment offering.

There are nine points from the Investment Act Of 1940 that defines QP. Also, Title III of the JOBS Act passed, meaning that all Americans are allowed to invest in private companies after January 2016. The limit is $5K for income up to $100K and $10K for income between $100K – $200K.

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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. 

About The Author

35 thoughts on “Can Anyone Be An Accredited Investor? The Government Can’t Tell”

  1. can you explain what you mean here? Im not sure arbitrating is the right word you mean to use….?

    Thank you!

    “As of 2019, my favorite investment to build passive income for retirement is investing in real estate crowdfunding. My favorite real estate crowdfunding platform is Fundrise, started in 2012.

    It’s all about arbitraging the valuation and cap rate differentials between heartland real estate and coastal city real estate. Fundrise and other platforms have enabled retail investors to invest across the country in real estate projects once reserved only for institutional investors.”

  2. I have a related question to this article’s subject. Government enforcement isn’t really there for the accredited investor status, and varies by the firm you invest with on checking for status.

    So was wondering, what about the non-accredited investor limits (generally 10% investment limit against your income or net worth, whichever is higher if income (or equivalent net worth) is $100k, otherwise the limit is 5%). Is there much, if any, enforcement by government or the investment/crowdfunding firms, whether you’ve invested past your non-accredited limits (at a particular firm or the total spanning across firms – to which each firm wouldn’t know about your total investments). I assume the limit is perhaps more like a guideline and enforced only as best as the individual investment firms can do?

  3. RealtyShares is one of the platforms that allows simply checking boxes regarding Accredited Status. I believe this is one reason they are taking a leadership position. Though I do worry at some point this may be an issue. I’m not knocking them. I’m at 85K invested through them. However, I also believe that anyone who can read should be able to make their own financial decisions and the “protection” offered by the government is another example of overreach. Though knowing how the government loves to “protect” people I could see them changing the game and making RealtyShares change their methods.

    CrowdStreet requires third-party verification of accredited status. It is free when investing with them and goes through VerifyInvestor. You get a PDF via Email from a lawyer stating you are an Accredited Investor. The process is fairly painless. I have 150K with them. Thus far no issues with preferred returns being paid on any investments. The jury is still out on IRRs since the deals are typically 3-5 years in length.

    LendingHome also requires third-party verification. They use InvestReady but InvestReady will accept the PDF from VerifyInvestor to complete the process. About 250K in a Self-Directed IRA through Self Directed IRA Services. The process to move money from Vanguard to them was not too bad. LH covers all costs or at least did. LH does require a 50K minimum. The platform is very easy to use.

    OK, etiquette wise I probably shouldn’t write this and it may make me look like a shill but LH is running a $500 bonus to both the new client and the referrer. Though I have no way of collecting as I don’t have emails for anyone and none of you have mine.

  4. All of us here at our company do not agree with the SEC law. We have met some really nice folks that are smart with their money and knowledgeable on their investments but we have not been able to work with them because they’re not accredited. If SEC is concerned about the people, then provide education, have them pass a test that shows their knowledge. But don’t put restrictions on people. Where is the freedom on that? If a firm feels that they only want to work with accredited investors, so be it. There is no justice for all with the current SEC laws.

  5. Hello,

    I share the same frustration (bordering total anger) over the fact that I am not allowed to invest in startups simply because of how much have or don’t have.

    I’ve created a petition asking our elected officials to request that the SEC change the rules that currently restrict 97% of Americans from investing in startups.

    Currently, the SEC only allows wealthy individuals and families to invest in startups. They are relying on a definition for who is considered an ‘accredited’ investor that only looks at income or wealth. This definition is effectively restricting more than 97% of Americans from investing in startups.

    Every American, regardless of income or wealth, should have access to the same investment opportunities. The idea that how much money someone has or makes determines what investments are allowed is offensive. The market is not a country club, and access should be open to all.

    I hope it is OK for me to post this here, but I really want to get all of the folks out there that want to see this accredited investor limitation removed together so that we can push our legislators to act.

    I hope you all will sign the petition.


  6. Stealthy1Percenter

    First – love the site. I check in once a week for new content and you rarely disappoint.

    In your opinion, at what point should a high net worth investor/accredited investor look into alternative investments such as private equity, angel investing, etc. I assume it will vary based on risk profile, but at what point should one look into these things? 2MM, 3MM?

  7. This has been a huge issue for me. My sisters and I inherited an LLC and had a bunch of cash to invest, but due to the rules EVERY member of the LLC has to be accredited in order for the entity to be considered accredited. My youngest siblings were years away, whereas me and my next sis were very close to or just over the limit. We ended up dissolving the LLC so we could invest individually since we couldn’t meet the standards as a group, which was definitely not ideal.

    The catch is a lot of our assets are real estate, which is very blurry as far as current value. My one sis decided she was “close enough for government work” and signed as accredited on a few investments. We had been investing with/ lending to one guy/group for years, but suddenly he graduated to deals the size that his attorneys strongly suggested that he require investors to be accredited. This was purely to protect his interests – most of the investors were the same and would continue. But he either had to register with the SEC and pay big $$ for all that paperwork or he could simply require that his investors be accredited and avoid having to register. He and his attorney both really wanted us to continue investing and all but asked us to just lie on the forms, commenting that “No one would ever see them.”

  8. This is quite curious indeed. I can see it being more of a call of the fund or administrator to determine whether or not to verify the details of investor eligibility versus the government anyway. The IRS has other things to worry about. I can understand why there are restrictions, but agree that people should be able to do what they want with their money and there probably are a decent number of people who are borderline or underqualified as an accredited investor who buy into alternative investments without being flagged.

  9. Ace is technically right that the burden is on the equity issuer in cases of general solicitation. SEC Rule 506(c) states that the issuer has to take “reasonable steps” to verify the accredited investor status of the purchasers. What “reasonable steps” actually entails is less clear. Like most SEC rules, enforcement of a policy determines the nuances of the policy itself.

  10. My understanding is that the SEC has clarified the accredited investor rule, to exclude investors whom self certify. There has to be a third party or third party documentation verifying such status.

    The burden is on the equity issuer.

  11. I’ve always believed in free markets. You’re right that this is probably geared toward co’s interests. I’ve had some RE deals come my way but ultimately, as a married person, I can’t be 100% sure of being over 300k right now. Can’t be sure of much right now.

    Texas just passed an interesting intrastate crowd funding law. Punch line is, unaccredited can only invest 5k/year and the raise maxes out at $1MM/co/yr. of course, both entities have to be in state. I wouldn’t be surprised if SEC’s JOBS act regs for crowdfunding were similar in limit.

    PS, how are you approving within 10 mins now? Outsource?

  12. Adam @

    At minimum an education component would be really nice. Tech employees in San Fran should be able to invest in startups. CFA’s should be able to invest in hedge funds, etc…

    1. I believe a CPA and a Registered Representative are automatically AI’s without the asset it income standards.

      1. According to this statement from the SEC, CFAs are not necessarily accredited investors.

        “Moreover, as the Commission’s Investor Advisory Committee (“IAC”) has pointed out, the current “accredited investor” definition may be under-inclusive. **Potential investors who most people would consider to be financially sophisticated, such as a Chartered Financial Analyst or a graduate professor of corporate finance, may not have the income or the accumulated net worth to be eligible to be “accredited investors,”** but they may actually be better able to protect their own interests.”

        1. Sorry I misread CPA for CFA but I can’t find anything that would suggest a CPA is automatically an AI.

          1. DCM

            Interesting. The source of my information was a private investment I made in December. CPA and Registered Rep were listed as categories. Having seen your post, I researched and could not find those categories either.

            I qualified on income and did have to go through a 3rd party to verify. It was a law firm. The certification is only good for 3 months.

  13. I’m in a similar situation with Lending Club. I needed to confirm that I made greater than $70k/yr to invest with them. Strictly on a W-2 salary standpoint I’m too low but some moonlighting I’ve been doing recently took me temporarily over. I felt comfortable now saying that, yes, I do make enough. However, for the next year, when moonlighting stops, my income will again drop below that threshold until I’m finished with my medical training and able to find a higher paying job. Should I stop being able to invest with Lending Club for the next year because I now make less than $70k? I don’t think.

    I don’t think either that the government should be determining if we’re doing something “stupid” or “risky” with our money.

    1. That would make no sense to not be able to continue to invest, especially since you gained another year of experience investing in P2P, and should theoretically understand more about the product and how to invest.

  14. Wow, talk about making it tough to invest in Elio (whatever that is). But good for them, as they are a private company. A lot of private companies want to get investors whom they trust and/or know. There’s usually a limited number of spots too.

    Are you back to $1 million yet? The thing is… what happens if you go over $1 million, and then the stock market brings you back down to $900,000 two months later? Is the gov’t saying you are now no longer able to invest in alternative investments or private offerings just like that?

    It doesn’t make sense to me. The SEC has got to update their rules and add an education component to its definition.

  15. According to the million dollar rule I’m an accredited investor. That doesn’t mean I’m qualified to make such investments. I have no formal financial training. I save a lot and have a high paying blue collar job. My income from investments and salary equal 200k annually. Those rules are silly, I couldn’t explain one word in a prospectus. I’d bet some dirt poor right out of school hot shots could do way better than I could.

    1. Thanks for sharing. You point out one of the interesting scenarios the gov’t creates. You made your money not from investments, and can invest in any alternative investment/private deal you want. But let’s say someone who has spent 7 years in the investment business, who is not an accredited investor yet, isn’t allowed to invest. That makes no sense.

      The bottom line: the accredited investor definition is a guideline. It’s investor beware, investor offerer beware. If there are cases of the government punishing an up and coming worker for making $150,000 a year but saying he is accredited, please let me know!

  16. I’m all “damn-the-man” as well, and would like to see the accreditation revised (net worth =/= financial savvy) without drying the access of capital to innovators, (although I am not sure how to do that) but remember:

    1) If you self-accredit, but are not by definition an accredited investor, you’re entering into the contract by fraud. This may not become an issue if the sun keeps shining, but you will lose your standing to protect yourself if anything goes sour. Even if the SEC isn’t regulating it, you’re going onto some pretty thin ice in the world of Madoff without the potential of recourse. You invest in your “buddy’s” tech start-up or real-estate venture and they take your capital to fund their new life on the beaches of Southeast Asia? Well, you were the first one to commit fraud. You breeze by this possibility in your post, and I applaud your acknowledgement of this risk – but man that seems like a risky game to play.

    2) Investments limited to only accredited investors are not as strictly regulated by the SEC, so the requirements for information and accounting disclosure are not the same as public offerings. By definition you are entering into investments with more limited information to assess. Your time in finance and on wall-street put you in position to accurately assess your first private equity investment, but would the average person? Even the average financial blog reader? P/E ratios and cap rates are about as savvy as most financial blog readers are. And that is far beyond the financial information the average citizen has, but can they protect themselves? Should we care? You wisely recommend to “invest in what your know”. But how does that reconcile with investing with a more limited disclosure in alternate investments?

    I guess, I want the government to not restrict my access to opportunities but, until the definition changes, for me the potential reward of self-accreditation outside of the SEC’s definition is not worth the incurred risk. Thanks for continuing to produce great content and evaluating more advanced financial topics.

    1. After I posted that I thought: it’s like taxes. I don’t like them, I believe they should be different, I will look to legally reduce my tax burden….

      but I am not willing to commit tax fraud in order to more closely align the tax code to what I believe it should be instead of what it is.

      1. I like your take back. Can’t be overtly against Big Government. They see and know everything!

        We must protect our family and other loved ones from persecution by following all guidelines. Who knows who might disappear in the middle of the night?

    2. I agree with you completely. I do not like the rule, I think the rule is unfair and unnecessary, and I agree it is unlikely that the rule will ever be enforced. But I am reluctant to make a material misrepresentation just because of that. And you are right – if you do have a case for securities fraud – you are coming in with unclean hands making it tougher on yourself.

    3. I agree with you for the most part, but I think you might be overstating the risk of the “unclean hands” defense, and I’m not sure it really equates to fraud. Would you be making a deliberately false representation in order to be able to invest? For sure, yes. But I don’t think that gives the company the right to commit horrible acts and escape liability entirely.

      First, “unclean hands” is an equitable defense, which means that the court has discretion whether to deny relief entirely, or just take it into consideration when determining damages. Rarely is it applied as a complete bar to recovery. The conduct has to be pretty egregious, in my experience. If you invested every dime in a risky business and it imploded for honest reasons (negligence, maybe, but not embezzlement), and as a result you lost your home to foreclosure, losing a chunk of equity with it, then I could see the court applying the unclean hands doctrine to deny relief, because you should have had an adequate reserve to continue paying your mortgage. But if you fudged the numbers by a modest amount and lost your investment due to malfeasance by the company, I don’t see a court denying you relief because of that misstatement on the application. On balance, the company’s acts were worse, and I think you’ll still recover. (Although the judge might admonish you not to lie about that again.)

      Second, I don’t think the company would win a counterclaim for fraud based on your misstatement because the company would have to show damages that arose AS A RESULT of the misrepresentation. Your potential lie about your assets/net worth isn’t something that causes the company to suffer damages. A lot of people think of “fraud” as being any lie or misstatement and round that up to a potential lawsuit, but one of the necessary elements of fraud is that the damages must be caused by the misrepresentation. The lie has to be central to the harm.

      I’m not saying it’s necessarily a good idea to go out there and lie about your financial stats to invest. There may be a number of other downsides to lying, especially on paper, and especially under penalty of perjury. But I wouldn’t worry *too* much about unclean hands/fraud as a result of fudging the numbers a bit.

      1. I certainly didn’t mean to imply it would save the promoter who may be committing fraud. But if you are going to allege a bad act, you generally do not want to give evidence that supports you yourself potentially be a bad actor. If you are making a case that you were misled, having a material misstatement will undermine your credibility.

  17. I’ve long argued that the AI rules are there to protect the promoter and not the investor. When you check that you are an AI and you clearly and knowingly are not – you have made a misrepresentation. So if you wish to press a case that you were defrauded – you come in with unclean hands. This protects the promoter class.

    In a potential case of securities fraud – the plaintiff is either an AI who has wealth and thus less sympathy or someone who misrepresented himself and deceived the promoter.

    In either case, the promoter is protected.

    The harm is for those of us who are not willing to make a misrepresentation even if we are willing to accept the risk of loss.

    1. I think the rules were designed to protect the investor not the promoter, but I agree with your opinion otherwise – it seems that the investor is in a double-bind. What are the penalties for self-accrediting if you’re not really accredited? I also think the promoter has a responsibility to take reasonable steps to verify accredited investor status, so if you do lie, and the SEC finds that the promoter should’ve known you were lying, maybe you don’t lose your ability to sue for fraud? At worst, the promoter might have a counterclaim against you, but do you really lose your ability to get your share of damages? On the other hand, aren’t most securities fraud cases class action anyway? You would probably just recover your prorata share with the rest of the class.

  18. I would think part of the rationale for establishing the rules is to protect the investments from the whims of those who might be more prone to pull things out at a moment’s notice when things get bad. If an investment is full of investors who put in $5,000 but only have net worth of $50,000, they might be more panicky and start selling at the first sign of trouble, causing losses in even greater numbers, whereas accredited investors would, in theory, be more able and seasoned to ride out a storm, thus creating more stability.

    There is a reason that short investors target stocks with heavy retail investments, because they’re nervous and quick to pull the trigger, making them easy ‘targets’. The investments would not be able to target high net worth individuals without keeping the retail contingent at bay.

    1. Debt free Dan

      Everything I’ve invested in which requires me to be accredited has been real-estate related. One platform asked me to verify by sending PDFs of statements. So, there was some diligence on their part. The other type of real estate investment is an LLC formed by one manager and other passive investors. I believe there is a cap of 35 non-accredited investors which is some sort of SEC limit, so having accredited investors in the deal raises the cap of how many people can invest in the deal. In practice, many of these deals generally want the minimum number of people to raise the funds they’re seeking so they have less overall paperwork and people to wrangle.

      I don’t see a problem with faking your accredited status so long as you’re prepared to bear the consequences. FS readers probably qualify. However, there’s no shortage of people who behave foolishly with their money.

  19. I have hit the accredited investor barrier once recently, and thankfully found a workaround. Basically I made the investment through a relative who does meet the accredited criteria. If the investment works out, I’ll be glad to take her out to steak and wine! I did, definitely, wonder about the verification process.

    Thanks for the concise, insightful and super informative article. Your point about the offering firm getting some protection by requiring investors to verify accreditation makes a lot of sense.

    Learning something new is a great way to start the day!

  20. Quoted on Financial Samurai. To quote Homer, “Woohoo!”

    It’s funny, being a by-the-book sort of person, pushing the limits isn’t something that comes naturally to me. I tend to stay between the lines, more out of habit than anything else.

    Thanks for the reminder that sometimes you have to decide for yourself which rules to follow and which ones to find a way around.

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