Roughly 8.25% (10 million households) in America are accredited investors according to the Federal Reserve's calculations in 2013. The economy and the stock market and real estate market boomed in 2019. And despite the dips in 2020 due to the pandemic, things have bounced back since Q1 2020. Thus, the number of accredited investors is likely closer to 10% of all households.
Accredited investors control the majority of wealth in America. Therefore, if you want to start a business, start a business that focuses on accredited investors. That's where you can service the few, and get maximum return for your efforts.
Let's first define what an accredited investor is.
What Is an Accredited Investor?
In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence. Or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
In 2020, the SEC updated the list of various ways one can qualify as an accredited investor. Now, holders in good standing of the Series 7, Series 65, and Series 82 licenses qualify.
The term “accredited investor” is defined in Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC) as:
- a bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company
- an SEC-registered broker-dealer, SEC- or state-registered investment adviser, or exempt reporting adviser
- a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5 million
- an employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million
- a tax exempt charitable organization, corporation, limited liability corporation, or partnership with assets in excess of $5 million
- a director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that company
- an enterprise in which all the equity owners are accredited investors
- an individual with a net worth or joint net worth with a spouse or spousal equivalent of at least $1 million, not including the value of his or her primary residence
- an individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse or spousal equivalent exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year or
- a trust with assets exceeding $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment
- an entity of a type not otherwise qualifying as accredited that own investments in excess of $5 million
- an individual holding in good standing any of the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
- a knowledgeable employee, as defined in rule 3c-5(a)(4) under the Investment Company Act, of the issuer of securities where that issuer is a 3(c)(1) or 3(c)(7) private fund or
- a family office and its family clients if the family office has assets under management in excess of $5 million and whose prospective investments are directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment
How Many Accredited Investors Are There?
Roughly 8.5 million households qualify as accredited investor based upon the net worth requirement alone. And 6.1 million households qualify based on the $200,000 income threshold according to the data by the Federal Reserve for 2010.
Once again, these numbers are surely higher today. The stock market is up and the real estate market in many parts of the country have surpassed their 2006-2007 highs.
In addition, more studies on how many accredited investors there are under the new law should be released in the coming years.
What Can You Do as an Accredited Investor?
Once an investor qualifies as an accredited investor, that investor can then invest in private placements, private funds, and private investments. That includes things such as venture capital funds, venture debt funds, angel investments, hedge funds, and my current investment focus: real estate crowdfunding.
Real estate is my favorite investment class to build long term wealth. The asset is tangible, provides income, and has a utility, shelter. I'm currently investing heavily in the heartland of America through Fundrise and CrowdStreet. I believe there is tremendous arbitrage opportunity to invest in middle America property that's cheaper, with higher yields.
Technology is making remote work a trend. And people are moving out of expensive coastal cities in droves to live in lower cost areas. With the rise of real estate crowdfunding platforms like Fundrise, more capital will seek such opportunities, enriching first movers.
Accredited Investors Have More Access
The accredited investor definition is somewhat arbitrary. Why is $200,000 the right income number to allow one to invest in private deals? $200,000 is a relatively middle class income in places like NYC and San Francisco.
All the same, it's worth trying to be an accredited investor in order to gain as much access as possible. Your goal is to have the optionality to invest. Companies have varying degrees of strictness with regards to checking your accredited investor status by the way.
I invested in a private gin company in 2007 as a 29-year-old. They never checked my financials before I gave them $60,000 of my hard-earned money. There is no “accredited investor police” in other words.
In conclusion, the best thing you can do for your wealth is to have a well-diversified portfolio. Follow my recommended net worth allocation by age.
Invest in stocks, bonds, real estate, and alternative investments. You want some of your assets to zig when some of your other assets zag. Don't be like the folks who went all-in equities right before the financial crisis!
Recommendation To Build Wealth
Track Your Wealth For Free: In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools. You can track your net worth and analyze your investment portfolios for excessive fees. Further, run your financials through their fantastic Retirement Planning Calculator.
Those who are on top of their finances build much greater wealth longer term than those who don’t. I’ve used Personal Capital since 2012. It’s the best free financial app out there today.
Invest in real estate. As an accredited investor, I suggest checking out CrowdStreet, a leading real estate crowdfunding platform. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities where valuations are cheaper and cap rates are higher.
The spreading out of America is real post pandemic. I've invested $810,000 in real estate crowdfunding to diversify and earn more income 100% passively.