Accredited Investor - Confluence.VC

Accredited investors are typically high-net-worth individuals and businesses with the financial resources and experience to trade private, riskier investments.

 

Takeaways:

  • Accredited investors are individuals approved by the SEC to invest in sophisticated or complex securities.
  • It would be best if you met specific criteria to be accredited. These include having a yearly income of over $200,000 and working in the financial industry regulatory authority sector.
  • Unregistered securities sellers are not allowed to sell to accredited investors who have been deemed financially competent enough to take on the risk.
  • Accredited investors can buy and invest in unregistered securities provided they meet one or more requirements regarding income, net worth, asset size, governance status, professional experience, or professional knowledge.
  • Securities that are not registered with the SEC are riskier than those that have been.

 

 

What is an Accredited Investor?

A qualified investor is an individual or financial and business matters with the right to trade securities not registered with financial authorities. This privileged access is granted to them if they meet at least one requirement about their income, net worth or asset size, governance status, or professional experience.

 

The Securities and Exchange Commission uses the term accredited investor under Regulation in the United States to describe investors who are financially well-off and do not require the protection offered by regulatory disclosure filings. Accredited investors are high-net-worth individuals (HNWIs), banks, insurance companies, and brokers and trusts.

 

Understanding Accredited Investors

Accredited investors have the legal authority to purchase securities not registered with regulators like the SEC. Companies often offer this group of accredited investors securities. This decision can help companies save money by allowing them not to register securities with the SEC.

 

This type of share offer can be called private placing. This type of share offering can pose a risk to accredited investors. It can pose a great deal of risk to accredited investors.

 

The regulatory authority’s role is to provide guidelines and verify that companies offer shares to accredited investors. 1 Regulatory authority are responsible for determining if an applicant has the financial resources and knowledge necessary to invest in unregistered securities.

 

Access to venture capital and hedge funds is also available to accredited investors.

 

Accredited Investors: Requirements

Accredited investors’ regulations vary from one jurisdiction to another. Local market regulators or competent authorities usually define them. The definition of an accredited investor in the United States is set forth by the SEC in Rule 501, Regulation D.

 

An individual must have an annual income of at least $200,000 (or $300,000 if they are married) and the expectation that they will earn the same or higher income the following year to be considered an accredited investor. A person must have earned income over the thresholds in the past two years either as an individual or together with a spouse.

 

An accredited investor is also a person who has a net value greater than $1 million. This can be done either as an individual or together with their spouse. The SEC also considers an accredited investor if the person is a general partner, executive officer, or company director issuing unregistered securities.

 

An entity with assets greater than $5 million is an accredited investor. Accredited investors can also be formed if the equity owners are accredited, investors. An organization cannot be created solely to buy specific securities.

 

Recent Changes to Accredited Investor Definition

Recent amendments to the U.S. Congress’ definition of accredited investor included registered brokers and state-registered investment advisers.

 

The definition of an accredited investor was amended by the U.S. Securities and Exchange Commission on August 26, 2020. The SEC released a press release stating that the amendments allowed investors to be accredited based on defined measures of professional knowledge and experience and existing income or net worth tests. The amendments expand the pool of entities that could qualify as accredited investors by allowing any entity that passes an investment test to be eligible

 

Accredited Investor Requirements

Market regulators are charged with promoting investment as well as protecting investors. Regulators are concerned about encouraging investments in risky ventures, entrepreneurial activities, and other potential multi-baggers. These initiatives can be risky because they may only focus on research and development activities that are not marketable and could fail. These ventures can yield a significant return on their investors if they are successful. They also have a high chance of failing.

 

Regulators must also protect investors who are less knowledgeable and may not be able to absorb significant losses or understand the risks involved with investments. Accredited investors allow investors to have access that is both financially sound and knowledgeable.

 

Accredited investor status does not require you to complete a formal process. It is up to the sellers of securities they take several steps to verify whether the individuals or entities are accredited investors.

 

Accredited investors are individuals or parties that wish to register unregistered securities. To determine whether the applicant is an accredited investor, the issuer might ask them to complete a questionnaire. The issuer may ask for account information and financial statements to verify that the applicant is an accredited investor. You can attach tax returns and W-2 forms. Salary slips are also acceptable. The issuers can also assess an individual’s credit reports to provide an additional assessment.

 

Example of an Accredited Investor

Let’s say that an individual had a $150,000 income for the past three years. They had a $1 million primary residence with a $200,000 mortgage, a car valued at $100,000 with an outstanding $50,000 loan, a $500,000 401(k), and a savings account of $450,000. The income test failed for this individual. However, the test on net wealth shows that they are accredited, investors. This does not include the primary residence’s value. Net worth is assets with fewer liabilities.

 

The net worth of this person is exactly $1,000,000 This is a calculation of assets other than their primary residence of $1,050,000 ($100,000. + $500,000 + 450,000), less a $50,000 car loan. They are eligible to become accredited investors if they meet the networth requirement.

 

Who is eligible to be an accredited investor?

An accredited investor is defined by the SEC as:

 

  1. An individual whose gross income exceeds $200,000 yearly or whose joint income with a spouse/partner exceeds $300,000. These years and reasonable expectations of the same income in the current fiscal year.
  2. A person whose net worth or joint net worth exceeds $1,000,000 with their spouse or partner.

 

Is there another way to become an accredited investor?

A financial professional with a FINRA Series 7 or 62 can be designated as an accredited investor.

 

What Privileges do Accredited Investors Get That Others Do Not?

Only accredited investors can participate in specific securities offerings under federal securities laws. These include participation in private placements, structured products, private equity, and shares in a private fund and private equity.

 

Why do you need to be accredited to invest in complex financial products?

Accredited investors will be able only to purchase these offerings. This is because they are financially capable of sustaining considerable losses or coping with volatility.

 

What if I lie about being an accredited investor?

You and the financial rural business investment company must be truthful when opening a financial account. Non-accredited investors may recover some of their losses if they lie about their status.

 

Bottom Line

A person or institution is an accredited investor if they have met specific SEC requirements that allow them to trade securities not available to the general public. The SEC created these regulations to protect investors, not limit them.

 

Accredited investors are becoming easier to obtain. Ask your financial advisor to determine your net worth within the required minimums. Also, take into consideration the licensing exams mentioned above. Be aware that there is increased risk and greater responsibility with higher potential rewards.

 

To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.

 

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