Accredited Investor

An accredited investor is any firm or individual that enjoys access to those securities which are not registered with the United States Securities and Exchange Commission (SEC) and hence, are not available to normal traders. However, an investor must fulfill certain criteria to become one.

An accredited investor can make angel investments and spend on venture capital, private equity funds, real estate investment funds, hedge funds, cryptocurrency investment options, etc. Some such investors include high-net-worth individuals (HNWIs), investment banks, private equity companies, partnership firms, etc.

• Accredited investors are people or institutions given special status, allowing them to deal in securities not registered with the regulatory authorities.
• The investors who acquire accreditation belong to different categories, including high net worth individuals, brokers, trusts, banks, and insurance companies.
• They are more prone to government scrutiny.
• Though the financial authorities do not interfere with the investments that take place, they keep track of who is being accredited to handle the riskier options of the investment market.

An accredited investor gets an opportunity to deal in securities that are not accessible to normal people or firms in trading. Regulation D of the SEC allows individuals and firms to sell securities to investors, exempting a few from SEC guidelines. The ones who get access to such assets are considered accredited market traders.

As the registration process is expensive, the securities-issuing firms or individuals save lots of money. As the unregistered assets tend to involve higher risk, the financial authorities verify the transactions dealing with such securities. This is to make sure investors participating in the deal are financially strong enough to handle such investments. This is what makes them a kind of accredited investor.

Every nation has a specific set of accredited investor requirements. In the United States, Regulation D’s Rule 501 outlines criteria that one has to meet to be eligible for becoming an accredited trader. 

A person or firm can is accredited only when either of the following SEC criteria is met:

• The annual income of the entity or individual must be at least $200,000 or $30,000 if the spouse’s income is combined.
• The person or company should be a specialist in the field. The investors aspiring to be accredited must have the required knowledge, and they must acquire Series 7, 65, or 82 licenses. 
• The firm or individual should have a net worth of $1 million or above. It could either be an individual income or combined with a spouse. However, the value of the primary residence remains excluded.

When an entity or individual fulfills any of the above criteria, it ensures the investor is capable enough to bear the losses, if any. Though SEC does not restrict the accredited investing options in any manner, it does make sure that the investment options are not accessed or made available to someone incapable.

Let us consider the following examples to understand the concept better:

Example #1

Scarlet decides to try investing in securities that are not accessible to other investors. Hence, she went through the requirements of becoming an accredited trader. She checked the pointers but found herself ineligible with respect to the annual income and net worth requirements. However, her Series 7 license helped her grab the opportunity to become an accredited investor.

Example #2

Michael chooses to invest in American startups, a riskier deal than making a normal investment. Putting money in a startup might either give 100x returns or even lead to a complete zero result. 

To invest, Michael needed to have more than $1 million of net worth. Thus, an angelist verifies the accreditation before allowing him to invest as an accredited trader. Once the accredited investor verification is done and the investor is found financially capable of bearing losses, the deal is allowed. 

As the name suggests, accredited investors have to prove their worth being called so. When an entity is accredited, the authorities know that they are eligible to tackle the losses resulting from an investment. 

Though the financial authorities do not interfere with the investments, they keep track of who is being accredited to handle the riskier options of the investment market. In short, the accreditation of investors is a type of government recognition that assures an entity has lots of money to cover up the losses if required.

The unregistered investments are riskier than the normal ones as only the basic information is made available to the participants. Based on that set of information, they decide whether to invest in an option.

Such investment options are not meant for novice traders as they require a high level of knowledge in investment. To be an accrediting investment participant, one needs to be a “knowledgeable” individual or entity.

Though an accredited investor and qualified purchaser have access to private funds and are similar, there are a few differences that investors must be aware of. 

The authorities scrutinize the accredited players based on the ability of the individuals or institutions to invest in specific kinds of securities that remain exempted from SEC guidelines. On the other hand, qualified purchasers are the ones who want to maximize their set of securities under management. They are also referred to as super-accredited investors, given the financial milestones are pretty much higher for a participant, be it an individual or institutional investor.

This is a guide to Accredited Investor, its definition, pros & cons. Here we explain the requirements to become an accredited investor with examples. You can learn more about portfolio management from the following articles –

• Depositary Receipt
• Who is an Angel Investors?
• Meaning of American Depositary Receipts
• Career in Portfolio Management