What does an accredited investor do?
Accredited investors are high-net-worth individuals or businesses (like banks, insurance companies, trusts, and brokers) who are legally allowed to invest in unregistered securities, also known as alternative investments. This includes investments that are not traded on public exchanges and are not subject to the same level of regulation.
How does one qualify as an accredited investor?
To get privileged access to trade securities and make alternative investments, an accredited investor has to satisfy at least one requirement with respect to net worth, income, asset size, governance status, and professional experience. Accredited investors can also access venture capital, hedge funds, and angel investments.
The qualifying factors for accredited investors vary according to jurisdiction. It can be found in Rule 501, Regulation D by the US Securities and Exchange Commission (SEC).
Individual accredited investors must meet one of the following criteria:
- Have an individual annual income of at least $200,000 (or $300,000 if married filing jointly) over the last two years. The investor also needs to demonstrate the expectation of earning the same or higher income in the current year as well.
- Have a net worth over $1 million excluding the value of your primary residence.
- Be a general partner, executive officer, or director of a company issuing unregistered securities.
- Be a registered broker or investment advisor with a certain level of professional knowledge, experience, or certifications.
Entity-accredited investors must meet one of the following criteria:
- Have equity owners who are accredited investors.
- Be a private business development company or an organization with assets valued over $5 million.
- The company cannot be formed solely to buy certain securities.
Regulation of accredited investors and alternative investments
The unregistered securities can prove to be highly risky just as they can be highly profitable. The SEC does not subject these investors to the usual regulatory standards because they are understood as being quite financially sophisticated. They do not need the same level of protection provided by the regulations.
Some companies even offer securities directly to accredited investors as it allows them to remain unregistered with the SEC, which can save them a lot of money. This kind of offering is called private placement.
Since the risk involved is still great, despite the fact that the accredited investors may not need protection as much as the general population, authorities engage in regulation only to the extent of ensuring that the accredited investors know what they are getting into. They make sure that the investors have financial stability, and experience, and are making an informed decision about the investment after understanding the risks involved.
