The major mission of the Securities and Exchange Commission (SEC) is to protect investors from illegal or dangerous financial practices, including fraud, by requiring complete and truthful financial disclosures from companies that offer securities to the public such as bonds, stocks, and mutual funds. The SEC also defines who and what an accredited investor is and has established “tests” that are used to determine accredited investor certification.
How the SEC Protects Investors
The SEC protects investors in a number of different ways, but largely through two major approaches. One approach establishes procedures and mechanisms to help ensure potential investors are not misinformed through fraudulent sales pitches. The second approach helps ensure individuals seeking capital for their business or project disclose everything with transparency, accuracy, and through an established, uniform process.
Tests to Achieve Accredited Investor Certification
There are two basic “tests” an individual must “pass” to achieve accredited investor status. It should be noted, no test is actually taken or passed as you would take and pass an exam. Providing evidence fulfilling the test (or requirement) is sufficient to achieve this status and qualifies one to invest in particular types of investment opportunities or be approached by businesses offering these opportunities and seeking qualified investors.
Income Test – In order to “pass” this test, you must have an annual income greater than $200,000 USD (or joint income with a spouse greater than $300,000 USD) in each of the past two years, along with a reasonable expectation to earn at a minimum that same amount in the current year in which you are making the investment.
Net Worth Test – In order to qualify as an accredited investor through the net worth test, your net worth (the value of your assets minus liabilities) must exceed $1 million USD, either as a single person or jointly with your spouse. However, you are not permitted to incorporate the value of your personal residence in the net worth calculation.
The new rules mentioned above, and including others not mentioned, that determine accredited investor certification are designed to protect both the investor and the individual or entity offering the securities.
By “passing” one of the tests mentioned above, you will have access to a somewhat exclusive and potentially highly profitable category of investment opportunities.
