Hello my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from John and John says, Hi Marco, love your podcast and the great resources you have on your site. Wondering if you can answer a question. I seem to get conflicting and full-on. I understand. To be an accredited investor, you either have to make $200,000 a year for at least the last two years or have a net worth of $1 million minus your primary residence. Is that the total value of your primary residence or minus the equity in your primary residence factoring in your mortgage balance? First off, for those that are wondering, what is an accredited investor? An accredited investor is someone who meets a certain income and net worth designation, which is defined by the Securities and Exchange Commission. The Sec, I'm sure many of you, if not all of you, have heard of the sec and more specifically as part of their regulations, it's under what's known as Rule 501 of Regulation D.





I know that sounds pretty technical, you don't need to worry about that part, but being an accredited investor allows you to invest in private offerings which are exempt from sec registration. So publicly traded securities are examples of securities that require sec registration. So think of the stock market, Nasdaq, New York Stock Exchange, all that stuff. They have to register with the SEC and go through a long regulation process to get their securities registered. An investment in a private company, however, or a private investment through what's known as a private placement is an example of a private offering that does not need to be registered with the SEC. That doesn't mean they don't need to file, but they don't need to go through the registration process like a publicly traded company does. So the reasoning behind or reasoning for being an accredited investor is so people can prove that they have sufficient financial knowledge to protect themselves and their own interests and also have sufficient financial assets to weather investment losses.

So I don't know if I truly believe that was their motivation long ago, decades ago, when they put these regulations in place. I don't know if it was really to protect the individual investor, but that's an opinion and a comment and a debate for another time. But to qualify as an accredited investor, a person must meet one of two tests there. There are other rules that apply. There's about eight of them, but these are the key ones, the two that apply to individuals because trusts and companies or corporations can qualify on their own. So to qualify, number one, you have to have an annual income of at least $200,000 or $300,000 for joint income with your spouse for the last two years with the expectation of earning the same or higher income in the current year. Or number two, you must have a net worth that exceeds $1 million either individually or jointly with your spouse.

But here's the key, the value of your primary residence, your home, it cannot be included when calculating net worth, so it doesn't matter how much equity you have in it. The primary residence does not partake in your ability to qualify or be designated an accredited investor. But on the flip side, you are mortgage doesn't count against you either. So whatever that may be up to the fair market value. So if you're calculating joint net worth with your spouse, it is not necessary that property be held jointly, if that makes sense. Being an accredited investor can give you certain advantages when it comes to building wealth, higher rates of return and better diversification are really two main benefits for investing in private placements. These are private offerings that are not available to the general public or through public offerings. These two drivers can potentially compress the time that it takes to generate wealth because these are offerings that may have higher risk,