The term "accredited investor" is a legal term that defines the status of a natural person (a human being) or legal person (i.e., corporations). The term is important as it relates to the financial regulations set forth by the Standards and Exchange Commission (SEC) – a person who is considered to be an accredited investor is not subject to many of the limitations and regulations that the SEC imposes on non-accredited investors.
Note: The term "high-net-worth individual" (HNWI) is used mainly by the financial industry. It is not a legal term and is not the equivalent of being an accredited investor. However, since many financial institutions define HNWIs along similar guidelines as used by the SEC, high-net-worth individuals also often happen to be accredited investors.
In particular, accredited investors are legally allowed to buy securities not registered with the SEC, access hedge funds, and engage in venture capital investments or angel investments. In other words: Accredited investors can engage in many investment opportunities which may potentially yield great returns but also carry a certain amount of risk. Thus, the distinction between accredited and non-accredited investors is mainly a measure to protect non-accredited investors from financial risks they may not be fully aware of.
While CARL's stated goal is to democratize access to the world of hedge fund investment, we are still legally required to vet you before providing you with our services.
In the US, the requirements for this special status are laid out in Rule 501 of SEC Regulation D (Securities Act of 1933, 17 C.F.R. § 230.405). According to the rule, natural persons are considered to be accredited investors if they can satisfy one or more of the following requirements:
- They have had an income of more than $200,000 (or $300,000 joint income with a spouse/spousal equivalent) for the preceding 2 years, as well as a reasonable expectation of retaining that income level in the current year.
- They have a net worth (or joint net worth with a spouse/spousal equivalent) of more than $1,000,000 (excluding their primary residence, unless it carries liabilities exceeding its fair market value).
- They have assets under management (AUM) worth more than $1,000,000.
- They hold professional certifications designated by the SEC, such as Series 7, Series 65, or Series 82 licenses.
How Is Net Worth Calculated?
When calculating your net worth, it's important to note that both assets and liabilities should be included. For example, if you own a car worth $20,000 but you have a loan on that car worth $5,000, then, for the purposes of calculating your net worth, your car is worth $15,000.
Your primary residence is also excluded from the calculation, unlike other real estate you may own. There is only one exception to this rule: If the mortgage value on your primary residence exceeds its fair market value, the amount in excess is counted as a liability. For example, if your primary residence is worth $500,000 and carries a mortgage worth $300,000, neither of these count towards your net worth. If the mortgage on that same house comes to $550,000, however, the $50,000 exceeding the worth of your house are now counted as liabilities.
You should also be aware that you can only apply for accredited investor status as a couple if you're married. For example, suppose you make more than $200,000 a year, and your spouse or spousal equivalent makes $50,000 a year. In that case, your income level is not enough for you to qualify for accredited investor status as a couple, and you cannot opt to apply as a single person with your $200,000 income level instead.
Since the SEC prohibits non-accredited investors from investing in hedge funds, CARL is legally required to perform a due diligence check on you before giving you access to our portfolio of carefully vetted investment strategies. Aside from following the law, however, there is also a good reason for the SEC to impose such a requirement on willing investors in the first place:
The accredited investor system is designed to ensure that investment opportunities that carry a certain amount of risk (such as venture capital) can only be accessed by individuals who have either
- the professional knowledge necessary to be aware of the nature of the risk or
- the means to be able to financially recover from any losses they may incur.
This is also why your primary residence is not counted towards your net worth according to the SEC guidelines, and it's why married couples need to show a higher income – the SEC guideline aims to protect people from any potential risks to their basic livelihood.
From the perspective of the US government, the reason for this system to exist is simple: The government recognizes that many of the investments made by hedge funds can be highly beneficial not just to the investors themselves but also to the overall economy, and thus should be encouraged while also limiting the personal risk of the investor and the risk to the economy at large. Therefore, the government allows natural persons to engage in such investments only if they can prove they have what it takes to succeed in the hedge fund business or any other bold financial field.
The term "accredited investor" is a legal definition. As such, you don't need to apply with the SEC or any other government agency to acquire the status. You also don't get a license which shows that you're an accredited investor. You gain this legal status automatically once you qualify under any of the criteria outlined above.
When you contact CARL to access CARL's extensive tools and carefully vetted hedge funds, CARL is legally obligated to determine your status as an accredited investor. This means that you'll need to provide CARL with all relevant information that may help determine your status, such as proof of income, financial statements, or a personal balance sheet, including documents that allow us to determine your net worth. Once we have established your status, you are free to engage with everything CARL has to offer, from the sophisticated tools for investing and keeping track of your investments to our portfolio of quantitative investment strategies.
Note that your status may change over time. For example, if you used to be an accredited investor as your net worth exceeded $1,000,000, but your net worth has gone below this threshold since, you no longer qualify under this particular criterion. However, you may still be considered an accredited investor due to your income level or the professional certifications you hold.
If you used to be an accredited investor and made more than $200,000 a year within the timeframe outlined above, you may lose your legal status due to marriage. If you and your spouse don't have a joint income of more than $300,000 a year, you no longer qualify under this particular criterion, though you may still qualify due to your net worth, for example.
Thanks to CARL, the only barrier that stands in the way of diversifying your portfolio with sophisticated alternative investment opportunities is the legal requirement for you to be an accredited investor. Simply contact us to go through the vetting process, and once you're approved, you can set up your CARL account and start investing with a minimum investment as low as $20,000.
The CARL app provides you with everything you need, from a vetted selection of investment strategies to the tools you need to invest directly from your bank account and a real-time portfolio overview. With CARL, you can check on your investments or edit your portfolio at any time via your smartphone. It's never been this easy for accredited investors to get into hedge funds.