Access More High-return Portfolios as an Accredited Investor

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Can a person earn good passive income from investments like stocks traded in NASDAQ? The answer is yes. But for those who want much higher returns, they need to look someplace else. However, it might not be easy to find.

In reality, not all investments are available to the public. Some are designed for select Americans who meet the standards or qualifications of the Securities and Exchange Commission (SEC). These criteria are necessary for several reasons.

First, unlike common investment portfolios, such as bonds or mutual funds, these other types of assets are not easily liquid. In other words, the company cannot convert them into cash more quickly.

Second, some portfolios need a certain level of “financial sophistication.” The individual or entity doesn’t only have the money but also possesses the specialized knowledge and expertise to make wise investment decisions.

Consider someone who likes to place their money on oil and gas investment companies. This person is likely to receive guidance from experts working directly with these firms. These specialists can generate forecasts, give advice, and provide materials for decision-making like financial statements.

But at the end of the day, they’re the ones who will make the call on when and how much to invest. Money can only do so much in some cases.

The good news is these investments often provide high returns and tax benefits, which make them attractive. The question is, how can one access these? The answer: accredited investor.

What Is an Accredited Investor?

An accredited investor can be a person or an entity (like a corporation or limited-liability partnership) that has met the standards or definitions of SEC. These criteria look into two factors: net worth and specialized knowledge.

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How Much Should the Investor Have?

First, to qualify as an accredited investor, the individual must have a high income or net worth. Based on the Regulation D’s Rule 501 under the Securities Act of 1933:

  • An accredited investor must have an individual net worth of over $1 million when making the investment. The amount also needs to be higher if they wish to include their spouses.
  • A person may still invest in these high-return investments even if they don’t have over a million’s net worth if their annual income exceeds $200,000 for two consecutive years before the investment purchase and that they expect to earn the same in the succeeding years. If their spouse participates, this minimum threshold then increases to $300,000.

Based on the 2010 Dodd-Frank Act, calculating a person’s net worth for the sake of qualifying as an accredited investor no longer includes the value of the primary residence. This helps prevent an individual from inflating their net worth.

However, there are certain situations wherein the net worth calculations can include the primary residence. This happens if the person holds the right to the securities before the enactment of the act or on or before July 20, 2010.

Primary residence can also be included if the person qualified as an accredited investor based on their net worth at the time they secured the rights, as well as when they hold securities from the same issuer (such as an investment company) other than the newly purchased right by July 20, 2010.

Net worth calculations may also be affected by the market value of the primary residence and the incurred debt.

These include an underwater mortgage situation, wherein the market value falls lower than the principal mortgage. The difference between the two becomes part of the liability in calculating net worth.

What If the Person Doesn’t Have the Income or the Net Worth?

Before, determining who becomes an accredited investor was limited to a person’s net income or net worth. The problem with this is it somehow ignores the fact that not all moneyed individuals can make wise investment decisions all the time.

This doesn’t mean that they cannot hire people to help them or lack knowledge. It could be that they don’t have specialized skills, knowledge, or expertise to invest properly in, say, oil and gas in the United States.

For this reason, SEC introduces provisions to allow knowledgeable individuals to participate even if their income or net worth is not high:

  • They must be a “knowledgeable employee” of a private fund. It’s not enough they are employed by the investment or fund firm. They must have intimate information on how to manage and distribute these funds.
  • They hold active licenses for Series 7, 65, and 82. Series 7 is an examination that allows the passer to sell securities products except for futures and commodities. Series 65, meanwhile, lets a person work as a financial advisor, particularly specializing in investment analysis. Series 82 is another exam that deals with private securities.

While not everyone can be an accredited investor, new rules make it easier for many to qualify. Even if they don’t, they can aspire to be one considering the huge tax breaks, benefits, and returns that these investments offer.

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