If you’ve just gotten started playing the stock markets and working to build up your nest egg, you may be coming across a variety of terms you’ve yet to see before. Just because these terms and concepts are new to you, though, doesn’t mean they shouldn’t be things you learn about.
For example, many people wonder to themselves, “Why would you want to become an accredited investor? Becoming an accredited investor is important if you’re interested in diversifying your portfolio with slightly riskier options, and is determined by the SEC, or United States Securities and Exchange Commission. Since gaining the status of an “accredited investor” opens you up to a broader range of investments and determines that you have the wealth to protect against severe losses, it can be particularly beneficial to anybody truly interested in building their wealth. Here’s a simple step-by-step guide to becoming an accredited investor.
Step 1: Determine your net worth.
Since part of becoming an accredited investor has to do with how much wealth you have to protect riskier funding opportunities, it’s important to know your net worth before you apply to get accredited. To calculate your net worth, you first want to take a look at the past two years of your pay history. If you’ve made over $200k each year, you may be eligible, although that number goes up to $300k if you’re a married individual filing with your spouse. Once you’ve taken a look at your income, you’ll need to add up your assets (not including your home) to make sure you have assets valued at over $1M. Finally, you’ll want to subtract any liabilities (including loans and credit card bills) to arrive at your net worth.
Step 2: Collect the appropriate documentation.
After you’ve calculated your net worth, it’s time to gather up all of the appropriate documents you’ll need to prove your net worth is what you say it is. Since companies need to verify that what you say is true in order to grant you investor status as an accredited investor, it’s helpful to have all of the necessary paperwork easily accessible should you want to invest in unregistered securities or make a big venture capital move. Start by gathering your tax returns from recent years as well as a credit report, and other statements from your banking and brokerage accounts. You may also want to talk to an accountant or investment advisor since they can also vouch for your net worth, assets, and liabilities.
Step 3: Verify you qualify according to the SEC’s definition for an accredited investor.
If you’re looking at investing in unregistered securities, under SEC guidelines these companies will be required to give you a form that needs to be filled out to verify that you are, indeed, an accredited investor. Don’t sweat it: these forms may vary from company to company, but all of the information you’ll need to provide you’ve already gathered in the previous two steps. Since each form’s specific purpose is to ensure that you meet the SEC’s definition of an accredited investor, with your net worth, proof of income, and other documentation in hand, filling out the proper paperwork and making it through the screening process should be a breeze.
Keep in mind that if you’re interested in getting into riskier investments or private equity funds that aren’t available to the general public, you’ll need to verify that you qualify as an accredited investor by following the above steps. It’s a common misconception that an investment advisor can help you invest in anything and everything, and as such there are some situations when you need to prove your investor status in order to qualify for certain private funds. Keep the above steps in mind and it should be easy to prove to your financial advisor or any other private companies who might need to know that you are, in fact, an accredited advisor.
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