How to become an accredited investor

Tyler York

If you want access to high risk, high reward opportunities such as investing or startups or hedge funds, you need to become an accredited investor.

In this article, we’ll take a deeper dive into what an accredited investor is, how to become an accredited investor, and how to become an accredited investor even if you do not meet the financial requirements of $200,000/year in income or $1 million net worth.

How to become an accredited investor
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What is an ‘accredited investor’?

Accredited investors are those who have exclusive access to securities and funds that are not registered with the Securities and Exchange Commission (SEC) — investable products not made available to the public. Examples of these investments are:

  • Venture capital funds
  • Hedge funds
  • Private equity deals
  • Private placements
  • Angel investments

These investments aren’t registered by the SEC and therefore do not have SEC’s protective requirements for consumers, such as quarterly reporting and disclosure requirements. These investment types require that the investor either have knowledge to make an educated decision on their own, or enough capital that they can afford for the investment to fail. That’s why the SEC created the accredited investor requirement in Securities Act of 1933, which includes a financial criteria that is intentionally high for most individuals even today.

The accredited investor requirements were created in order to protect individual investors, but it has also been a barrier between knowledgeable individuals without the required income or net worth and their ability to invest in these vehicles. Apart from their net worth and investment capabilities, an investor’s accreditation status is one of the main things firms check during their screening process to verify eligibility for investment.

Aside from individuals, the following entities can also obtain accredited investor status:

  • Registered Investment Advisor (RIA) firms
  • Banks
  • Brokerage firms
  • Trusts
  • SEC- and state-registered investment advisors
  • Governmental bodies, entities, and funds organized under foreign laws

To become an accredited investor, you must meet one of the accredited investor requirements below.

Accredited investor requirements

You can qualify to become an accredited investor in the United States if you meet one of the following requirements:

Financial criteria

  • Net worth that exceeds $1 million, excluding the value of your primary residence (individually, or with a spouse or partner)
  • Income over $200,000 per year individually, or $300,000 per year with a spouse or partner, in each of the prior two years, and a reasonable expectation of the same for the current year

Do you meet the financial criteria? Congratulations! You qualify as an accredited investor.

There is a common misconception that there is a ‘process’ to become an accredited investor that is handled by a government body or independent agency, but that is not the case. Instead, an investor’s credentials is reviewed by the individual companies offering the securities, and if you meet the requirements, you qualify for that transaction.

If you don’t qualify via the financial criteria, there are a number of professional criteria options that they can pursue.

Can you become an accredited investor even without money?

Yes. The 2020 amendment to the accredited investor definitions added many new options for those interested in becoming accredited investors:

  • Hold a FINRA Series 7, FINRA Series 65, or FINRA Series 82 license in good standing
  • Be a director, executive officer, or general partner of the company selling the securities
  • Be a “family client” of a “family office” that qualifies as an accredited investor
  • For investments in a private fund, be a “knowledgeable employee” of the fund
  • Be a member of an investment entity that own “investments” in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered

If you do not meet the financial criteria and are not in one of these specific edge case groups, then holding a FINRA Series 65 license in good standing is the easiest way to become an accredited investor without money. The Series 65 license is the most accessible and most common route, as it does not require sponsorship from a FINRA-member firm to sit for the exam (unlike the Series 7). We’ll walk you through how to do that below:

Photo by micheile henderson on Unsplash

How to become an accredited investor by through a Series 65 license

Pass the Series 65

The Series 65 is an advanced certification exam within the financial services industry. It is administered by FINRA, the industry’s self-regulatory organization, and costs $187 to sit for. You must answer 140 questions (130 scored, 10 experimental) in three hours, and get 72% (94/130) of them right to pass. For a complete walkthrough on the exam itself, visit our Series 65 complete guide.

A quick plug: Achievable’s Series 65 course is the best in the market, especially for those without a formal finance background. Our easy to understand material uses real world examples and casual language to make complex financial topics approachable to anyone. Peek inside for free to see if it’s right for you.

However, passing the Series 65 does not make you an accredited investor by itself: you also need to be “in good standing”, which means becoming a licensed investment adviser representative (IAR), either at the state level via your state’s regulator or at the federal level via the SEC. This means complying with all licensing requirements for the state or federal license, including registration and fees. This is comprise of two substeps:

  1. Become a part of, or register your own, registered investment adviser firm (RIA)
  2. Register yourself as an investment adviser representative (IAR) of that firm

Join, or create your own, registered investment adviser (RIA) firm

To register yourself as an investment adviser representative (IAR) and gain accredited investor status, you need to file the Uniform Application for Securities Industry Regulation, known as Form U4, on the FINRA Gateway. Only Registered Investment Adviser (RIA) firms can file Form U4s, which means that you’ll need to either be affiliated with one that will file the form on your behalf, or you’ll need to create your own RIA to file under.

If you’re affiliated with a firm, their compliance or registration team should help you once you’ve filled out Form U4. Easy! You are basically done at this point.

But if you want to become accredited without joining a registered investment adviser company, read on. You’ll need to start your own Registered Investment Adviser firm.

And if you do not want to navigate the accreditation process outlined below alone, was founded as a turnkey solution to help you through all the bureaucratic steps of becoming an accredited investor. Regdee will sign you up for the Series 65 exam and deal with all SEC registration requirements so you can put all your focus on prepping for your exam with Achievable.

How to start your own Registered Investment Adviser (RIA) firm

1. Incorporate your business

First, you will need to set up and incorporate your new RIA business. It is commonly recommended to incorporate as a S-Corporation (S-Corp) or Limited Liability Corporation (LLC) to ensure that you’re not personally liable for anything your firm does. Of course, if your firm is just an excuse for you to become an accredited investor, these concerns are less important, but LLCs still carry tax benefits over a Sole Proprietorship that are worth considering. Also, remember that no matter what corporate structure you use, you are not shielded from law enforcement if you break the law.

2. Register with the SEC or your state

After passing your FINRA Series 65 exam, you need to decide how you’re going to register your firm. You can opt to register at the federal level with the SEC, or at the state level with your local state financial services regulator.

Keep in mind that this is a serious process intended for new firms to complete before entering a highly regulated industry. Many hire a consultant for this step, and even with a consultant the process could take 2-3 months. You should also expect to incur the following fees:

  • Forming a company: ~$250
  • RIA Firm regulatory fees for initial filing and annual filing: ~$250 (varies by state)
  • Individual Adviser Representative (IAR) fees: ~$100 per employee, including you

Now, if you’re just creating an RIA firm to become accredited, you probably won’t need much else, but if you are planning to act as an investment adviser to clients, you’ll also need all of the tools that will make your firm run: domain name, computers, client billing software, marketing software, CRM software, reporting, compliance software, and more.

Once you’re prepared, it’s time to register your shiny new RIA firm with regulators.

2.1. Registering federally with the SEC

To register with the SEC, you need to fill out Form ADV. However, you must either have $100M assets under management (AUM) in order to qualify for registration, or you can register via the “internet investment advisers” exception, or Rule 203A-2(f).

The “internet investment advisers” exception “is available only to an adviser that provides investment advice to clients exclusively through an “interactive website.” An “interactive website” is defined by the SEC as “a website in which computer software-based models or applications provide investment advice to clients based on personal information provided by each client through the website.” This is broadly speaking of an interactive webapp that dispenses stock advice based on user inputs. In fact, to make sure that you don’t think running an adviser business through Zoom would count, they say “The rule is thus not available to advisers that merely use websites as marketing tools or that use Internet vehicles … in communicating with clients.

If your goal is to become a financial adviser to others with your RIA business, then this path is not recommended, as the SEC specifically calls out that running your advisory business exclusively remote doesn’t mean you qualify for this exemption.

However, if your goal is simply to become an accredited investor and not provide financial advice to anyone, then you can potentially take advantage of this loophole. You just need to build a website to support your application and fill out the SEC application. This method has worked for multiple people who documented their experience well, such as Natecation and Tyler McMurray. The upside of this is that because you are federally registered, you only need to pay the SEC registration fee and don’t need to worry about moving states and re-registering.

2.2. Registering with your state

Due to the $100M AUM requirement, the majority of registered investment advisers are initially filed within the state of residence of the business. If you’re filing within your state, there is no need to have $100M AUM or to use the “internet investment advisers” exception, but you’ll need to look up the specific process for your state and any additional regulations or requirements that you will need to meet.

Luckily, there are lots of helpful resources for each specific state. We picked out a few of the commonly searched ones for your convenience:

Then, in order to register in either case, you must file Form ADV with the SEC.

2.3. SEC Registration: Filling out Form ADV

Form ADV is a multi-part form that you will need to fill out in order to register with the SEC. The form consists of several parts, and is filed online on the Investment Advisor Registration Depository (IARD) website.

Form ADV contains five parts:

  1. Part 1A asks about you, your business practices, the persons who own and control your business, and the persons who provide investment advice on your behalf. It also contains Schedules asking for information about your owners, executive officers, indirect owners, relying advisors, and any disciplinary events. If you’re not in the financial advice profession and own your company alone, this should be pretty straightforward. If you need examples, Natecation recommends using the public filings of Wealthfront and Compound – two investment adviser startups – as a guide for what to put for your own firm.
  2. Part 1B asks questions required by state securities authorities and asks for additional disclosures. This is only required if you are applying for state registration. If you are applying for SEC registration only, you will automatically skip this on the IARD website.
  3. Part 2A asks you to create ‘narrative brochures’ containing information about your firm. They provide detailed instructions on Part 2 here. Be sure to follow their specific language instructions.
  4. Part 2B asks you to create ‘brochure supplements’ containing information about the specific individuals that will be advising under your firm. Again, if it’s just you, this should be pretty straightforward.
  5. Part 3 asks you to create a ‘relationship summary’ containing information for your supposed customers – retail investors. Like Part 2, the SEC provides specific instructions for you to follow.

Once you fill out Form ADV and submit it, the SEC is required to respond within 45 days, but many say that they respond sooner. They will not immediately reject your application if anything is wrong – they will ask for clarifications or updates, and give you a chance to fix any issues.

If you are just starting an RIA to become accredited, then make sure to follow these tips when filling in the form minimize your reporting and avoid needing to bring on a custodian (basically another firm that actually executes the trades an RIA sets up):

  • Make it clear in Form ADV that you do not plan to take control of client funds, and that you’re only giving advice without actually executing any trades on client’s behalf
  • Keep assets under management (AUM) at $0, so that you do not need to provide statements, keep trade confirmations, etc.
  • Draft a code of ethics according to the SEC’s instructions. You can keep it pretty generic, like Natecation’s.

With all of this, you’ve now completed the most challenging part of the RIA formation process. Nice work! Almost done.

If you plan to handle other’s funds, set up a custodian

If you plan to handle client funds and make investments on their behalf, your new RIA firm will now need to have a custodian, which is essentially another firm that holds your client’s actual assets and performs transactions on your and your clients’ behalf. This is typically a large firm like BNY Mellon or Charles Schwab. Charles Schwab has a nice page on choosing a custodian, and you should do your own research to find the best fit custodian for you.

If you do not plan to handle client funds and only plan to use this RIA firm as a vehicle for accreditation, then you do not need a custodian. You just need to ensure that you never handle someone else’s money

Register yourself as an investment adviser representative (IAR) of the firm

Once you’re part of a registered firm (including your own), you can submit your Form U4 on the FINRA Gateway and pay the associated registration fees. You will need to pay fees to either the SEC or your state, depending on how your RIA is registered.

Form U4 asks for the following information:

  • General information, such as your date of birth, the firm CRD number and billing code, employment address, et cetera.
  • Fingerprint information, which is exactly what it sounds like – you’ll need to provide a fingerprint. However, some jurisdictions have an exception for investment adviser representative only representation, which means that if you only plan to advise and not act a broker dealer, you may be able to skip this step in some states.
  • Registration with unaffiliated firms, which basically is checking to make sure you’re not registering under two companies. If you are, then you need to disclose that. Some jurisdictions do not allow dual registration.
  • SRO Registration. Investment adviser representative only applicants can skip this step.
  • Jurisdiction Registration. What type of registration are you (broker-dealer agent or investment adviser representative) and which jurisdiction you want to register in.
  • Registration requests with affiliated firms, which is asking whether there are other firms associated with the filing firm (aka where you work) that you want to be registered with. This is more common at larger firms, when you have both Wells Fargo and Wells Fargo Advisers, for instance, which are technically separate firms.
  • Examination requests, which you only need to worry about if you’re still rescheduling or rescheduling a FINRA or NASAA exam while this registration is occurring.
  • Professional designations, which is where you list any additional designations you hold like CFP or CFA.
  • Identifying Information, which asks for more personally identifiable information.
  • Other names, which asks for any other names you have used.
  • Residential history, which asks for your residential addresses for the past five years.

And with that, you’re done! You are an accredited investor through your RIA firm.

Maintain your RIA firm’s compliance

Just a note to be sure to keep your firm compliant year-to-year by filing an update amendment to the SEC or your state each year (and pay the associated filing fees), and keeping your individual IAR registration up to date as well. As long as there are no changes to your firm’s structure, this can be a very simple update that essentially says “no changes”.

Photo by Japheth Mast on Unsplash

Accredited investor verification

While there is no physical certification or license for being an accredited investor, security-issuing firms practice due diligence in verifying who has the ability to invest in their business. The criteria are dependent on what type of security is being invested on. Generally, the SEC requires firms to conduct a verification process including the following steps:

  1. The potential investor must fill out a questionnaire.
  2. The potential investor will be asked to attach supporting documents (financial statements, proof of asset ownership, proof of net worth, written recommendation from financial advisors, etc.)
  3. The firm will conduct additional credit report assessments to check for any outstanding debt

For income-based investors, firms will likely require proof of wages incurred such as tax returns, W-2 forms, and the like.

Prospective investors can skip the above steps by having their CPA, a third party licensed attorney, an SEC-registered investment adviser, or a registered broker-dealer certify that you are accredited in a letter dated within the last 90 days.

Some platforms, such as Angellist Syndicates, ask for proof of accreditation upfront so that they can handle the verification burden.

The bull statue on Wall Street, the capital of US finance and the home of FINRA. Accredited investors can invest outside of the stock market.
Source: Wallpaperaccess

Pros and cons of being an accredited investor

Being an accredited investor has its own set of advantages and disadvantages. Here’s a table to give you a clearer idea of what these are:

Gives you access to exclusive investment opportunities that are otherwise unavailable to the general publicThese opportunities generally have higher risk
Potentially higher financial returnsPotentially higher losses
Increased portfolio diversification, particularly into high growth opportunitiesGenerally requires high minimum investment amounts

The obvious pro to being an accredited investor is that you have privileged access to opportunities that public investors do not have. You get access to unregistered funds, angel investments, and syndicates – all of which are high growth opportunities.

However, accredited investors also have to vie for shares with other wealthy investors or investment firms, and as a result, significantly higher minimum investment amounts are needed. This could then lead to bigger losses should the investment fail — the higher the reward, the higher the risk.

Ready to score the best investments? Get accredited!

Being an accredited investor gives you the ability to access higher risk, higher reward opportunities that are not available to every individual. If you’re not able to meet the wealth or income requirements, we recommend taking a look at the Series 65 route shared above. You can try Achievable’s Series 65 course for free to see if it’s right for you to get started.

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