The reason why the SEC has placed certain restrictions on who may invest in certain private securities offerings is because of past fraudulent activity in these arenas. Some issuers in the past took advantage of investors, with promises of high returns, and the results for those investors were not good. Thus, the SEC took action and developed criteria that issuers and investors must follow. The term “accredited investor test” simply refers to one of several criteria investors must meet in order to become accredited investors.
The “Financial Test” (High Income or Net Worth)
The most familiar and earliest of the accredited investor qualifications is based on the investor’s income or net worth. This test is designed to weed out investors who do not have the financial capability or sophistication to handle the risks associated with certain investments.
However, after much public comment about the SEC criteria for who and what can be recognized as an accredited investor, the SEC has revised its criteria recently to include other ways to qualify beyond the financial test. Financial sophistication is now measured, according to the SEC, by more than simply financial wealth.
The “Knowledge Test”
As one way of expanding the definition of accredited investor, the SEC added the “knowledge” criteria as another accredited investor test. This means that a person can qualify as an accredited investor if he or she has certain professional certifications.
Individuals with certain licenses (Series 7, 65, and 82) administered by the FINRA and in good standing, now qualify as accredited investors. The SEC also retains the option in the future to reevaluate or add to the certifications, credentials, and titles it establishes as qualifying criteria for accredited investor status.
In addition, individuals with certain positions in the financial industry, as mentioned further below, also qualify for accredited investor status.
Knowledgeable employees of private funds can also qualify as accredited investors, but only for investments in that fund. In addition, any general partner, executive officer, or director of an organization offering a private securities investment, qualifies as an accredited investor. Again, only for investments in that fund.
As you can see, the “accredited investor test” can take various forms that lead one to obtain accredited investor status. The fastest way to qualify will depend on your individual status in terms of finances (income and/or net worth) and professional certifications or industry knowledge.
