An accredited investor refers to an individual or a business entity that is allowed to buy unregistered securities. These kinds of investors are usually wealthy people or entities that enjoy this special privilege provided that the required income, the status of governance, size of the asset, net worth, or professional eligibility and experience were met.
Accredited investors are those persons or companies that are financially well off who can take the risk of acquiring unregistered securities. Financial authorities like the Securities and Exchange Commission (SEC) permits the selling of these unregistered securities only to those who are accredited investors which may include the so-called high net worth individuals, insurance companies, trusts, brokers, and banks. Regulatory bodies authorize accredited investors to purchase this kind of securities because they are confident that their financial capacity has a greater chance to handle such a great deal of risky ventures.
They also determine if an individual or entity qualifies as an accredited investor based on the requirements mentioned previously. Accredited investors are also privileged to trade high-risk investments and instruments as well as access to various funds like hedge funds and venture capital. The main advantage of the companies that are selling securities to accredited investors is that they will not be required to register them to the SEC which will reduce costs on their part.
What are the requirements for accredited investors?
To qualify as an accredited investor, the SEC provides different tests to determine whether a person or a company could be deemed as passed. Among these basic tests involve the income, net worth, professional knowledge, and experience of applicants:
- Income: an individual with a spouse can be qualified as an accredited investor if they have an income of at least $300,000 or higher for the last two years. For a single individual, the only required income is at least $200,000. It is also necessary for them to maintain or surpass that amount for the following year to remain eligible.
- Net Worth: a person can be considered as an accredited investor if they have more than $1 million net worth whether as an individual account or joint account with their spouse. General partners, directors of the companies, or executive officers that are issuing unregistered securities may be considered accredited investors. On the other hand, private business development companies with assets of more than $5 million can as well be acknowledged as accredited investors.
- Professional knowledge and experience: qualifications as accredited investors can also be based on the professional certifications or credentials earned from recognized educational institutions. In the US, some of this required eligibility include Series 7, Series 65, or Series 82 licenses. Individuals who are knowledgeable employees concerning private funds are also considered accredited investors.
What are the benefits of accredited investors?
- The main benefit is access to more unique, restricted, and potential investment opportunities. While it is accessible only to those who have higher income, you can have access to bigger investments more than those who have lower income and non-accredited investors. The best example of an accessible investment is hedge funds which are only allowed to be handled by accredited investors.
- There is also a larger return of investments and it has increased diversification which could create profit in a shorter period.
- Companies that are selling securities to accredited investors will save time and money because they do not have to register their securities to SEC or equivalent regulatory agencies. Thus, resorting to accredited investors will allow a company to escape the strict and tedious requirements of financial authorities when it comes to securities registration.