Accredited Investor Letter: How To Prove Your Status
If you’re looking to invest in certain higher-risk/higher-return opportunities, you may need to prove that you’re an accredited investor.
What is an “accredited investor,” you ask?
An accredited investor is a person or entity that meets certain financial criteria, allowing them to invest in private offerings and other types of securities not registered with financial authorities.
One way to prove your accredited investor status is by providing an accredited investor letter, which we’ll be discussing shortly.
Key Takeaways
- An accredited investor is a person or entity that meets certain financial criteria, allowing them to invest in private offerings and other types of securities not registered with financial authorities.
- An accredited investor letter is a document that confirms your accredited investor status and is often required by companies offering private placements or other investment opportunities that are restricted to accredited investors.
- The letter typically includes information about your income, net worth, and investment experience and can be provided by a qualified professional who can verify your financial status.
What Is An Accredited Investor?
Years ago, when I began investing in real estate syndications, one of the first questions asked was about being an accredited investor. I didn’t realize that if you’re looking to invest in certain types of complex or sophisticated securities, you may need to have accredited investor status.
These individuals meet specific criteria set by the Securities and Exchange Commission (SEC) in the United States.
If you want to be considered an accredited investor, you must meet one of the following requirements:
- Have an individual net worth, or joint net worth with your spouse, that exceeds $1 million at the time of the investment
- Have an income exceeding $200,000 in each of the two most recent years or joint income with your spouse exceeding $300,000 in each of those years, and have a reasonable expectation of reaching the same income level in the current year.
It’s important to note that having this status does not necessarily indicate financial sophistication or investment knowledge. Instead, it measures financial resources and the ability to absorb potential losses.
Do You Have to Prove You’re an Accredited Investor?
Proving your status as an accredited investor isn’t always mandatory, but it becomes essential in certain situations, mainly when dealing with:
- hedge funds
- private equity funds
- real estate syndications
If you want to learn more about real estate syndications (my favorite investment), check out this video:
These entities may require verification of your accredited status to ensure you can make smart financial decisions on your own.
For instance, if you plan on making a significant investment, it’s not uncommon for a company to want to verify your accreditation status.
I’m a co-general partner with the Blue Metric group, where we offer RV park syndication investments to passive investors. Most of our investments are 506c, which requires us only to take accredited investors.
Related article: 506(b) vs 506(c) Syndication: What’s the Difference?
For some investments, companies might ask for tax returns or W2 forms, credit reports, and financial statements verified through a CPA or a third-party.
These documents help prove your personal or combined net worth, along with your understanding of financial matters, which is needed to become an accredited investor.
Apart from third-party websites, you can ask your Certified Public Accountant (CPA) to write a letter that confirms you meet the accreditation criteria.
In the next section, I’ll give an example of these letters and their use.
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Sign up for my newsletterCPA Accredited Investor Letter Example
Usually, websites that check if you’re an accredited investor ask for a letter from a CPA. This letter shows you have enough financial resources to be considered an accredited investor.
Also, these letters can serve as verification of your accreditation themselves. Plus, for most private real estate investments and funds, having a CPA letter is enough to show you’re accredited.
An accredited investor letter contains the following information:
- Date
- The investor’s name
- A statement saying you meet the requirements from The Securities Act of 1933, Regulation D, Rule 501
- Both the signature and printed name of the CPA
Accredited Letter Example
[Issuer Name]
[Issuer Address]
[City, State ZIP Code]
Dear [Issuer Name],
I am writing to verify that I qualify as an accredited investor under Rule 501 of Regulation D of the Securities Act of 1933. I meet at least one of these criteria:
- My individual or joint net worth with my spouse exceeds $1,000,000, not counting my primary residence’s value.
- My annual income was over $200,000 (or $300,000 with my spouse) for the last two years, and I expect to maintain at least the same income this year.
- I hold a significant role in the company offering these securities, such as director, executive officer, or general partner.
This letter serves to confirm my eligibility for investments under Rule 506 of the Securities Act. If you need more information or documentation about my accredited investor status, please let me know.
Thank you for considering this matter.
Sincerely,
[Your Name]
[Your Address]
[City, State ZIP Code]
Once you have this letter, you can start investing as a recognized, accredited investor. But is being accredited necessary for investing in real estate without actively managing it?
Let’s take a closer look.
Do You Need to be an Accredited Investor to Invest in Real Estate Syndications Without Being Actively Involved?
Many real estate syndications (group investments) require you to be an accredited investor to join a private fund. However, if the group raising the money follows SEC’s Rule 506 B of Regulation D, you don’t need to be accredited.
But, whether you need to be accredited or not can also depend on how much money the group is trying to raise. This affects whether they use Rule 506 B or 506 C of Regulation D.
Sometimes, a real estate syndication might ask for accredited investors, even if Rule 506 B doesn’t require it.
There’s another point to note. If the group uses Rule 506 B to raise money, they can’t publicly advertise the investment opportunity or its potential returns. This restriction can limit their fundraising, so some might prefer using Rule 506 C instead.
With Rule 506 C, they can fully advertise (i.e., social media, run ads, etc.) the investment but can only accept money from verified accredited investors, unlike with Rule 506 B.
Non-accredited investors might find it hard to locate these investment opportunities, even though they can invest in real estate syndications passively.
If you’re already an accredited investor, there might be a way to get verified for free. Let’s explore how you can get this free verification.
Join the Passive Investors CircleHow To Get Verified as an Accredited Investor for Free
If you want to verify your status as an accredited investor, some websites can do this for free.
Here are a few that you can use:
While these aren’t the only options available, they are known for being reliable. Keep in mind that other websites or ways of getting verified might charge a fee.
Entities as Accredited Investors
Entities can also qualify as accredited investors if they meet certain criteria. The following entities with assets in excess of $5 million are considered accredited investors:
- Corporations
- Partnerships
- Limited Liability Companies (LLCs)
- Trusts
- 501(c)(3) organizations
- Employee benefit plans
- “Family office” and any “family client” of that office
- Owners as Accredited Entities where all equity owners are accredited investors
- Investment Advisers
In addition to the above, any entity that owns more than $5 million in “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, and was not formed for the specific purpose of acquiring the securities offered, can also qualify as an accredited investor.
It’s important to note that the entity’s assets determine the accredited investor status and not the individual net worth or income of its directors, executive officers, or equity owners.
However, if an entity is a general partner of a partnership or a trustee of a trust that is an accredited investor, then the entity can also qualify as an accredited investor.
Don’t Miss Any Updates. Each week I’ll send you advice on how to reach financial independence with passive income from real estate.
Sign up for my newsletterInvestment Types and Opportunities
| Investment Type | Description | Key Characteristics |
|---|---|---|
| Private Funds | Investment vehicles not registered with the SEC. | Includes private equity, hedge, and real estate funds; higher minimum investments and potential returns. |
| Hedge Funds | Private investment funds using various strategies. | High minimum investments; strategies like long/short equity, global macro. |
| Private Equity Funds | Invest in private companies for eventual sale or IPO. | Longer investment horizon, significant capital commitment. |
| Venture Capital Funds | Invest in early-stage, high-growth potential companies. | High-risk, high-reward; significant returns if successful. |
| Rural Business Investment Companies (RBICs) | Invest in small businesses in rural areas. | Licensed by USDA; focus on agriculture, renewable energy, rural healthcare. |
| Private Placements | Securities offerings not registered with the SEC. | Available to accredited investors; includes equity, debt, and other securities. |
| Business Development Companies (BDCs) | Invest in small and mid-sized businesses. | Regulated by SEC; potential for high returns with higher risk. |
| Securities Offerings and Offering Exemptions | Ways for companies to raise capital without SEC registration. | Includes Regulation D, A, and Crowdfunding offerings; for accredited investors. |
Frequently Asked Questions
What is an investor accreditation letter?
An investor accreditation letter is a document that confirms an individual’s status as an accredited investor. It serves as proof that the investor meets the criteria set by the Securities and Exchange Commission (SEC) to participate in certain investment opportunities.
How do I get an accredited investor status letter?
To get an accredited investor status letter, you need to meet the SEC’s income or net worth requirements. You can request a letter from your Certified Public Accountant (CPA) or use a third-party verification website to confirm your status.
Who can provide accredited investor letter?
An accredited investor letter can be provided by a CPA, attorney, or financial advisor. They must have a professional relationship with the investor and be familiar with their financial situation.
What are the “Reasonable Steps” Required to Verify an Accredited Investor Letter?
The reasonable steps required to verify an accredited investor letter involve a thorough assessment to ensure compliance with federal securities laws. This process typically includes evaluating the total assets of the individual or entity, often with the assistance of a registered broker-dealer or investment advisor. The verification process might also involve checking the investor’s credit report to confirm their financial stability and good standing. It’s essential to collect additional information that supports the investor’s status, such as proof of income or confirmation of assets, to ensure they meet the criteria of an accredited investor as defined under federal regulations. For entities like an employee benefit plan or an insurance company, the evaluation may also include reviewing their investment decisions and overall financial health.
What is proof of income for accredited investor?
Proof of income for an accredited investor can include tax returns, W-2 forms, or pay stubs. The income must meet the SEC’s requirements to qualify for accredited investor status.
What is an accredited investor form used for?
An accredited investor form is used to verify an investor’s status as an accredited investor. It confirms that the investor meets the SEC’s income or net worth requirements and is eligible to participate in certain investment opportunities.
What is an accredited investor verification process?
The accredited investor verification process is the process of confirming an investor’s status as an accredited investor. It involves verifying the investor’s income or net worth and ensuring that they meet the SEC’s requirements. This process can be done through a third-party verification website or by obtaining a letter from a CPA or other professional.