According to Rich Dad, 90% of the wealth is controlled by 10% of the people. Because of the wealth they have accumulated, it allows the 10% to invest in other opportunities that the general public is not allowed to invest in. As a result, the rich get richer by being more selective in their investment choices by choosing the best investments and passing on the rest of them.
What is an accredited investor? The Securities and Exchange Commission (SEC) defines it as the following:
- Someone that has an annual income of at least $200,000 and will likely have it for the next two years, or
- A couple with an annual income of $300,000 and will likely have it for the next two years, or
- Someone with a net worth of $1,000,000 dollars (excluding their personal residence).
There are other entities that qualify as accredited investors (banks, insurance companies, etc.) but for the purpose of this article, we will stick with the three definitions above.
Why does the SEC care about defining an accredited investor and their involvement with investments?
They are the “watchdog” of the investing world. They are responsible for fraud prevention and protecting the uneducated and inexperienced investors from abuse. The Securities Act of 1933 and the Securities and Exchange Act of 1934 created the SEC and gave them these responsibilities. The definition of an accredited investor was the direct result of these new Acts.
There are two primary reasons that these definitions were put in place. First of all, it makes the assumption that if people have that level of income and/or net worth, they are more financially prepared to take on risk if the investment does not go as expected. The second reason is that there is a belief that those with higher net worth are more financially educated based on the level of financial success they have achieved and would be better positioned to evaluate investment opportunities.
Accredited investors can participate in certain types of investments that the general public cannot access. These include joint ventures, angel investing (funding businesses), pre-public offerings, private investment funds, and more. These types of investments are considered to be more sophisticated and require investors be accredited to better understand the investment as well as be financially poised against the potential risk.
How does this information apply to you? You have heard the expression that “the rich get richer.” At the very least, it should give you the urge to become an accredited investor if you are not already. Accredited investors have access to investment vehicles that accelerate their returns that cannot be accessed by everyone else.
Accredited investors could also help fund your investments, so in time, you can join the ranks of the accredited investors. Becoming an accredited investor does not require a certain degree from a college, or a trust fund from mom and dad. It is based on your financial statement, which is something that you can completely control.
Becoming an Accredited Investor
Since the requirement is to make at least $200,000 a year as an individual, it is unrealistic to achieve this goal as an employee. Less than 3% of the population makes this amount each year at their job. With the rare exception of athletes, professionals (doctors, attorneys, etc.), exceptional salespeople, and executives, most people will not make this level of income from their job.
In order to have a true shot at higher wealth, you have to go down an alternate path. Although there is more than one path to this goal, there are several different options. The most common paths for someone to become an accredited investor are:
- Starting a business
- Real estate investing
- Stock market investing
If you are trying to achieve this goal and you have very little capital to begin with, you are better off starting your own business or investing in real estate. Both of these can be done with very little capital and can be accomplished while you work your day job. It is possible to start a business with very little money, but as opportunities increase, so will your need for funding.
In real estate, you do not need to have the entire sum of money to buy a piece of property. Because of financing, you can leverage yourself into a position of controlling the asset without paying 100% of the money up front. This is also a viable strategy for those that have limited financial resources.
Even though you can make significant returns in the stock market, the downside is that it requires capital to invest. If you have some financial resources available and a solid education combined with a heath dose of risk acceptance, this is a great investment opportunity that can be harnessed to provide great returns.
Regardless of the path you select, it all comes down to having the right financial education. Devote yourself to your path. Learn everything you can. The more you know, the more you reduce your risk as it becomes less of a “guess” when selecting investments. Learn to evaluate the numbers and understand the investment. If you do not understand the investment, do not invest your money. If you invest and do not understand it, all you are doing is gambling. You are praying that everything goes well, and that isn’t the best investment strategy.
Using Accredited Investors
How can accredited investors help you become an accredited investor like them? This is where investing can open up to a whole new level.
You can tap into their capital to help you achieve your own investing goals. You have the ability to assemble one of the types of investments that would attract accredited investors.
If you had a great idea for a business but needed some funding to get it off the ground, you could use these accredited investors to fund the business. Or, if you had a great real estate deal that required a lot of capital (like an apartment building or a mobile home park), you could offer it to these accredited investors for their review.
The powerful concept is that you are not limited by your own resources. All it takes is an idea, an opportunity, some motivation, and determination. When you couple those skills with the capital of accredited investors, you can achieve anything.
Obviously you are dealing with investments that are highly regulated and it is critical to do them correctly. If you go this route, we strongly encourage you to seek competent legal advice about investment offerings. It is worth the time to do this properly.