The rich really do have access to more investment opportunities than the rest of us.

I remember the first time I was turned down when I went to invest money. The fund manager said “I’m sorry, but I can only accept investments from accredited investors.”

I’d never heard the term, but it’s one that every wealth-literate person should understand. And, ideally, become.

The Security and Exchange Commission (SEC) restricts certain investments to wealthier individuals they classify as “accredited investors.” In some ways, it serves as an official dividing line between the rich and everyone else.

Here’s what you need to know about accredited investors – and how you can become one yourself.


What Is an Accredited Investor?

The term first emerged out of Regulation D in the Securities Act of 1933. While the exact requirements have changed since 1933, the SEC currently defines an accredited investor as an individual who meets one of the following two requirements:

  1. Has a net worth of over $1,000,000 (not including their primary residence), or
  2. Earned at least $200,000/year (or $300,000 for married couples) for the last two years, and has a reasonable expectation to do the same this year.

If those requirements sound stringent, keep in mind that a net worth of a million dollars is not spectacularly wealthy in today’s world. After all, if you had a million dollars to retire on, it would only generate $40,000 a year in retirement income, at least according to the 4% Rule.

Note that legal entities, banks, and charitable organizations can also qualify as accredited investors, although they must meet different requirements.


How Accredited Investors Get “Certified”

If you’re near or above the threshold to be classified as an accredited investor, what do you need to do to officially become accredited?

Actually, nothing. There’s no bloated government bureaucracy processing applications and sending back certificates three months later.

Instead, the burden of responsibility lies with the investment issuer. To accept funds from investors, they must verify that they qualify as accredited investors.

That typically involves them asking for copies of your tax returns or personal financial statements, along with other supporting documentation. If they fail to verify your status, and your investment loses money, legally they could incur liability for your losses.


Investments Only Available to Accredited Investors

When fund managers and others put together investment opportunities, they have a choice: jump through the regulatory hoops required by the SEC, or avoid the red tape and only accept money from accredited investors.

For example, private equity funds and hedge funds often only allow accredited investors. It saves them a great deal of overhead and public reporting.

Venture capital firms also typically raise money only from accredited investors. They invest flexibly in tiny startups, and eschew the scrutiny of the SEC.

Another example is the growing phenomenon of crowdfunding websites, who largely accept funds only from accredited investors. There are a few exceptions however, such as GroundFloor and Fundrise, who accept money from the public as well.

The same goes for hard money lenders. In fact, it was a hard money lender who turned me down when I offered to invest, when I first encountered the distinction of accredited investors.

Wondering if it matters? After all, non-accredited investors have access to plenty of investments, right?

That’s true of course, but many of the investments available only to accredited investors offer better returns. Consider a 2018 analysis of public pensions by the American Investment Council, which found that private equity funds generated 8.6% annual returns on average. In contrast, public equity funds (such as mutual funds and ETFS) only returned 6.1% on average, and bond funds returned 5.3%.


5 Ways to Reach Accredited Investor Status

If you want to become an accredited investor, start with these five simple steps. But remember, “simple” does not always mean “easy”. None of these steps are complicated, but they all require discipline and dedication to maintain over time.


1. Earn More Money

There are countless ways to earn more money.

You could apply for a promotion and raise. Take on more responsibility, create more value for your employer.

Or you could find a new job that pays better. In your current field, or in another field with a higher salary ceiling.

If you do decide to switch careers, it may mean months or even years of additional training, education, and/or certifications. That’s the price of gaining valuable skills.

Another route is to start a side hustle. My friend Zack started giving food and beverage tours a few years back; then last year, he launched his own tour company. In addition to extra earnings, he and his wife get thousands of dollars of free food and beverages every year.

Finally, remember that some investments generate income as well.


2. Invest for Both Income & Growth

Over the long term, the S&P 500 has returned around 8% in capital growth, and around 2% in dividends. Alternatively, my rental properties have generated around 7% in yield (rental cash flow) and around 2% in average appreciation.

Which is precisely why I love index funds for growth and diversification, and rental properties for income. But each still produces both income and growth.

Your investing options don’t end there of course. You can invest in individual stocks, or actively managed mutual funds, or bonds, private notes, crowdfunding websites, starting a business, or countless other investments.

Regardless of the investment vehicle you choose, aim for either high growth, high income yields, or both. Remember, you can qualify as an accredited investor based on either your income or your net worth – but the more you have of each, the easier it is to snowball your wealth.


3. Maximize Your Savings Rate

Your savings rate is the percentage of your income that you put towards savings and investments. The higher it is, the faster you build wealth. Period.

Avoid the temptation of lifestyle inflation, as you begin earning more money. Most people reflexively spend more as soon as they start earning more: a bigger home, a sexier car, more meals out. But spending most of your income is precisely the mentality that keeps you on the financial treadmill.

To accumulate real wealth you need to check that impulse. Hold your spending steady, even as you earn more money, and you’ll find you start gaining financial momentum. Build enough momentum, and you become a millionaire and accredited investor.


4. Minimize Your Tax Burden

It’s hard to build wealth when half your money goes to taxes.

Income taxes, sales taxes, self-employment taxes, property taxes; some are avoidable, others aren’t, but they add up quickly. As you develop more wealth literacy, one of the lessons you learn is that the more money you lose to taxes, the less you can put towards building wealth.

Start intentionally structuring your finances around minimizing your tax burden. Maximize your contributions to tax-sheltered retirement accounts like IRAs and 401(k)s. Consider tax-sheltered accounts like HSAs for medical bills and 529 plans for education costs. Look for ways to minimize your self-employment taxes through your business expense planning.

And in your investments, opt for capital gains wherever possible, rather than paying full income taxes on quick profits.

Read up on these “sneaky” tax tactics to legally reduce your tax burden, and put more of your money to work for you rather than Uncle Sam.


5. Set Targets & Track Your Progress

Yes, becoming a millionaire accredited investor is a worthy goal. But it shouldn’t be your only goal – you need smaller milestones along the way to celebrate and keep you on track.

Start simple, aiming to reach a net worth of $50,000, or $100,000, or $250,000, or whatever makes for a logical next milestone for you personally. Aim to buy your first rental property, or to max out your IRA, or any number of other mini-milestones.

All the while track a few crucial numbers every month, including your savings rate and investable net worth. Your investable net worth does not include equity in your primary residence. You can’t invest with it, and it doesn’t count toward reaching accredited investor status.

I also track my FIRE ratio every month. The acronym “FIRE” stands for financial independence, retire early, and your FIRE ratio is the percentage of your living expenses that you can cover with your passive income from investments. When you reach 100%, working becomes optional, because you no longer need your day job to pay your bills.

On a yearly basis, track these five financial numbers to stay focused and keep building wealth.


Final Word

More Americans than ever before have achieved millionaire status and become accredited investors.

Yet more Americans are also under-saving for retirement and relying on Social Security in retirement, even as real benefits shrink. It largely comes down to a lack of financial literacy, and even more important, wealth literacy.

If you want to achieve a financial goal, you first need to know what it is, how much money you’ll need, and where that money will come from. Start with our more-than-just-retirement calculator to help you calculate exactly how much money you’ll need for retirement or any other major financial goal.

Know where you want to go, or you have scant hope of getting there.

Best of luck on your journey to become an accredited investor!