What Does it Mean to be an Accredited Investor?

Contents

The term “Accredited Investor” is one you will hear time and again in investment circles. Here we will investigate exactly what this term means, where it came from, and how you can take steps to become an accredited investor and indeed if you need to become an accredited investor yourself.

A Brief History of the Accredited Investor

The term accredited investor was coined in the late 1930’s by the US Securities and Exchange Commission as a method of regulatory protection for investors who did not have the resources or the sophistication to evaluate private security offerings and obtain disclosures.

Those investors who did possess this level of sophistication were afforded the privilege of having the much-prized status of an accredited investor. This move allowed the Government to free up resources spent on the highly-developed entities and individuals whose liquidity is securely established enough to meet any risks of loss.

This revolutionary step was quickly adopted around the globe, with financial authorities all taking their lead from the US.

What is an Accredited Investor?

The term “accredited” means to have a special authority and is afforded to those entities and individuals who have supporting resources and are (or) particularly knowledgeable within the field of securities trading. They then meet the requirements of being (or becoming) Accredited Investors.

In layman terms these are persons or business entities that have the assets, or the professional experience to be able to deal in securities outside of a Financial Authority. 

Thus, they are not reliant on the protection of financial security filings because they are within themselves already sophisticated enough to afford their own protection. This includes organizations that satisfy at least one requirement in regards to income, asset size, net worth, professional experience or governance status. These include Trusts, Investment Banks, Brokers, Insurance Companies and High Net Worth Individuals (HNWI).

What is a High Net Worth Individual (HNWI)?

There are several categories of HNWI and this refers to an individual that possesses a certain level of liquid assets. There is no defined level of how rich the HNWI must be, however there are thresholds used within the financial services industry.

These levels are at the “natural” level having liquid assets of 6 or 7 figure sums. A “very” HNWI will exceed $5million and the “Ultra” HNWI will exceed a figure of $30million.

Another classification by the financial services industry is an individual with liquid assets of $1,000,000 and qualifies for investment packages that are managed separately rather than mutually. However you can qualify with liquid assets of $100,000.

Remember that assessment on whether or not you qualify is made solely on your liquidity, a primary residence, regardless of worth, doesn’t qualify within this definition.

The Basics of Accredited Investment

An accredited investor has special and privileged access to direct investment in securities that are not necessarily registered with the various financial authorities.

Note the definition here for various financial authorities relates to the regional governance of each financial authority, in short the rules and therefore the requirements can be different according to the standards required within a country of authority.

Each country or region has its own regulatory authority, therefore, it is always important to note the specific requirements based on the regulatory authority you are overseen by.

The Accredited Investor needs to meet some brief specific requirements, in that they have realized an Income over $200,000 for the last two years, this is $300,000 for a joint income and can reasonably expect to receive the same level of income this year.

This ensures that the Accredited Investor has the financial security to withstand any losses in these high investment areas and has the expertise at hand before they make entry within these privileged and often high yielding unregistered securities.

How can I become an Accredited Investor?

Individual financial authorities, although taking their lead from the US SEC, do have their own criteria. That said, the US has set the benchmark that all others follow and it’s therefore acceptably prudent to utilize this benchmark.

  • Earn an income over $200,000 each year or joint income over $300,000, together with a spouse.
  • Have a net worth of over $1 million - excluding your primary residence.
  • Be an executive officer, general partner, director or a related combination thereof for the issuer of a security being offered.

The SEC deems these accredited investors to be able to fend for themselves. They have enough wealth, so as to not necessitate help or protection from federal and state securities laws in the same way that non-accredited investors will need it.

How the Process Works

Because the raising of capital is a complicated and also costly process, in that companies will register securities with the SEC in order to help mitigate against losses. They make regulatory filings and register a public placement.

For private placements the registering of securities isn’t required. The company does not need to register securities with the SEC, which of course saves a lot of cost for them, and the need for regulatory process. The company simply provides these securities to the accredited investor, privately and directly. 

Participators in these types of private placements do risk the loss of their investment, and as such financial authorities have established the steps discussed herein to ensure that they are financially stable, as well as being experienced and knowledgeable about these risky ventures. 

The regulatory body must verify the liquidity of the accredited investor, checking that they are indeed in compliance with the requirements. They can also offer advice in respect of the guidelines of qualification for entities and individuals as accredited investors.

Final Thoughts

Being an accredited investor can be seen as a badge of honor for some wealthy investors. Becoming an accredited investor will work in opening doors to non-registered investments with hedge funds, venture capitalists, and the like. Due to the fact that you will not benefit from regulatory body protection as an accredited investor though, your own experience and the need for due diligence are greatly heightened. 

The deals and opportunities that you have a chance to invest in as an accredited investor may sometimes be higher risk, though the rewards can also be substantially improved if you are successful.

About the author

Kate Leaman

Kate Leaman

Kate Leaman is the Chief Analyst and author at InvestorGreg. She won the Sky News Fiona McDiarmad award and subsequently became a journalist for Sky News. Read more

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