Accredited Investor Letter: How To Prove Your Status

If you’re looking to invest in certain higher-risk/higher-return opportunities, you may need to prove that you’re an accredited investor.  

What is an “accredited investor,” you ask?

An accredited investor is a person or entity that meets certain financial criteria, allowing them to invest in private offerings and other types of securities not registered with financial authorities.

One way to prove your accredited investor status is by providing an accredited investor letter, which we’ll be discussing shortly.

Key Takeaways

    
• An accredited investor is a person or entity that meets certain financial criteria, allowing them to invest in private offerings and other types of securities not registered with financial authorities.
    
• An accredited investor letter is a document that confirms your accredited investor status and is often required by companies offering private placements or other investment opportunities that are restricted to accredited investors.
    
• The letter typically includes information about your income, net worth, and investment experience and can be provided by a qualified professional who can verify your financial status.

What Is An Accredited Investor?

Years ago, when I began investing in real estate syndications, one of the first questions asked was about being an accredited investor. I didn’t realize that if you’re looking to invest in certain types of complex or sophisticated securities, you may need to have accredited investor status.

These individuals meet specific criteria set by the Securities and Exchange Commission (SEC) in the United States.

If you want to be considered an accredited investor, you must meet one of the following requirements:

    
• Have an individual net worth, or joint net worth with your spouse, that exceeds $1 million at the time of the investment
    
• Have an income exceeding $200,000 in each of the two most recent years or joint income with your spouse exceeding $300,000 in each of those years, and have a reasonable expectation of reaching the same income level in the current year.

It’s important to note that having this status does not necessarily indicate financial sophistication or investment knowledge. Instead, it measures financial resources and the ability to absorb potential losses.

Do You Have to Prove You’re an Accredited Investor?

Proving your status as an accredited investor isn’t always mandatory, but it becomes essential in certain situations, mainly when dealing with:

    
• hedge funds
    
• private equity funds
    
• real estate syndications

If you want to learn more about real estate syndications (my favorite investment), check out this video:

These entities may require verification of your accredited status to ensure you can make smart financial decisions on your own.

For instance, if you plan on making a significant investment, it’s not uncommon for a company to want to verify your accreditation status.

I’m a co-general partner with the Blue Metric group, where we offer RV park syndication investments to passive investors. Most of our investments are 506c, which requires us only to take accredited investors.

Related article: 506(b) vs 506(c) Syndication: What’s the Difference?

For some investments, companies might ask for tax returns or W2 forms, credit reports, and financial statements verified through a CPA or a third-party.

These documents help prove your personal or combined net worth, along with your understanding of financial matters, which is needed to become an accredited investor.

Apart from third-party websites, you can ask your Certified Public Accountant (CPA) to write a letter that confirms you meet the accreditation criteria.

In the next section, I’ll give an example of these letters and their use.

CPA Accredited Investor Letter Example

Usually, websites that check if you’re an accredited investor ask for a letter from a CPA. This letter shows you have enough financial resources to be considered an accredited investor.

Also, these letters can serve as verification of your accreditation themselves.  Plus, for most private real estate investments and funds, having a CPA letter is enough to show you’re accredited.

An accredited investor letter contains the following information:

    
• Date
    
• The investor’s name
    
• A statement saying you meet the requirements from The Securities Act of 1933, Regulation D, Rule 501
    
• Both the signature and printed name of the CPA

Accredited Letter Example

[Issuer Name]
[Issuer Address]
[City, State ZIP Code]

Dear [Issuer Name],

I am writing to verify that I qualify as an accredited investor under Rule 501 of Regulation D of the Securities Act of 1933. I meet at least one of these criteria:

    
• My individual or joint net worth with my spouse exceeds $1,000,000, not counting my primary residence’s value.
    
• My annual income was over $200,000 (or $300,000 with my spouse) for the last two years, and I expect to maintain at least the same income this year.
    
• I hold a significant role in the company offering these securities, such as director, executive officer, or general partner.

This letter serves to confirm my eligibility for investments under Rule 506 of the Securities Act. If you need more information or documentation about my accredited investor status, please let me know.

Thank you for considering this matter.

Sincerely,

[Your Name]
[Your Address]
[City, State ZIP Code]

Once you have this letter, you can start investing as a recognized, accredited investor. But is being accredited necessary for investing in real estate without actively managing it?

Let’s take a closer look.

Do You Need to be an Accredited Investor to Invest in Real Estate Syndications Without Being Actively Involved?

Many real estate syndications (group investments) require you to be an accredited investor to join a private fund. However, if the group raising the money follows SEC’s Rule 506 B of Regulation D, you don’t need to be accredited.

But, whether you need to be accredited or not can also depend on how much money the group is trying to raise. This affects whether they use Rule 506 B or 506 C of Regulation D.

Sometimes, a real estate syndication might ask for accredited investors, even if Rule 506 B doesn’t require it.

There’s another point to note. If the group uses Rule 506 B to raise money, they can’t publicly advertise the investment opportunity or its potential returns. This restriction can limit their fundraising, so some might prefer using Rule 506 C instead.

With Rule 506 C, they can fully advertise (i.e., social media, run ads, etc.) the investment but can only accept money from verified accredited investors, unlike with Rule 506 B.

Non-accredited investors might find it hard to locate these investment opportunities, even though they can invest in real estate syndications passively.

If you’re already an accredited investor, there might be a way to get verified for free. Let’s explore how you can get this free verification.

Investment Types and Opportunities