Using The Net Worth Method to Become an Accredited Investor
VerifyInvestor.com
There are many benefits to becoming an accredited investor, namely, the ability to participate in nonpublic and limited offerings, including most offerings under Regulation D. Not just anyone can achieve such status, though. The Securities and Exchange Commission (SEC) has certain standards someone must first meet in order to participate in the private investing industry, including offerings that utilize Rule 504 and Rule 506.
According to the SEC, there are a few different paths someone can take to become an accredited investor. For instance, they could qualify by taking a required exam or by meeting a certain level of income. Another path to accredited investor status is by attaining a net worth of over $1,000,000 USD, either individually or jointly with the one’s spouse or spousal equivalent.
Let’s explore the net worth method for accredited investors, including how it works and what you can do to increase your net worth in order to qualify.
How The Net Worth Method Works
As mentioned, someone striving for accredited investor status by way of net worth must have a net worth (that is all assets minus all liabilities) of at least $1,000,000 USD. However, there are a few rules as to what is and isn’t included in this net worth calculation.
The largest exclusion is the individual’s primary residence. For the purposes of the net worth method, this asset can’t be included in the calculation. Because the asset isn’t included, neither is the debt connected to the primary residence, i.e. a mortgage or home equity line of credit… in most cases. If the debt has increased in the last 60 days, then it is included as a liability when calculating net worth. Also, if the debt on the primary residence exceeds the value of the home, then the excess debt is included as a liability.
Before calculating your net worth, take a look at the examples and other considerations provided by the SEC to ensure you include and exclude the right assets and liabilities.
How To Increase Your Net Worth
If you haven’t yet hit the million mark, but want to qualify as an accredited investor with the net worth method, you’ll need to increase your net worth before you can do so. The factors that have the largest impact on your net worth are your income and your debt. To increase your net worth quickly, work on paying off your debt to reduce your liabilities. To increase your income and thus bolster your assets, consider working additional hours or taking on contract work on the side.
Finally, as you probably know, being a hopeful accredited investor, you can increase your net worth through profitable investments. Put what cash you do have to work for you by investing it and you could see your net worth increase substantially. Thanks to SPACS and the IPO on-ramp provided by the JOBS Act, investing in high-potential emerging growth companies is easier than ever. Of course, investments can go south as well and set you back further from your goal, so always be smart and strategic with where you invest your money.
If the net worth standard feels out of reach, consider pursuing another path toward accredited investor status, such as increasing your income to at least $200,000 USD annually for two years, passing the series 7, series 82, or series 65 exam, or working for a private fund with which you want to invest.
Updated 8/30/2023
We go into even more detail on how to qualify as an accredited investor when your net worth or income just is not quite there yet in our article on qualifying as an accredited investor with low income. Of course, it takes a lot of hard work and even time to achieve your financial goals, however, here are five guidelines that can be used as a basis to get started:
Pay off debt
Track your expenses so you do not overspend and accrue more debt
Manage your assets properly
Utilize your employer’s retirement contribution-matching programs
Invest wisely and consider stock market alternatives.
We would never give specific investment advice, however, our blog is dedicated to providing basic guidelines for financial success. Here are a few highly recommended blogs along those lines:
Selecting the Right Money Manager for Your Investment Needs
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