Startup Glossary: Accredited Investor
This page explains what it takes to become an accredited investor, how to find out if you’re eligible, and how investment managers verify your position as an accredited investor through a screening procedure.
What is an Accredited Investor?
To trade securities that have not been registered with financial authorities, you must be an accredited investor. If they have a certain level of income, net worth, assets, governance standing, or professional expertise they are entitled to this privileged access.
US Securities and Exchange Commission (SEC) regulation D refers to investors who are financially savvy and have a decreased need for regulatory disclosure filings. The phrase “accredited investor” is used. Accredited investors include high-net-worth people, banks, insurance firms, brokers, and trusts, amongst other types of financial institutions.
How to Become an Accredited Investor?
Accredited investors have more opportunities to make money than non-accredited investors since they have more money to invest. As a result, the Securities and Exchange Commission (SEC) does not require enterprises and private funds to register certain investments as long as the firms are selling the assets to accredited investors.
Accredited investors can put their money straight into the lucrative worlds of private equity, private placements, hedge funds, venture capital, and equity crowdsourcing. However, the Securities and Exchange Commission (SEC) sets the criteria for who can and cannot be an accredited investor, and so participate in these opportunities.
To become an accredited investor, many people believe there is a “process” that one must go through. This is not the case. Investor credentials are not reviewed by any government agency or independent entity, and no exam or document certifies someone as an accredited investor. Instead, the corporations that issue unregistered securities do due diligence before the sale in order to identify a potential investor’s legal standing.
Who is an Accredited Investor?
The phrase “Accredited Investor” is used interchangeably with the word “Experienced Investor” in the UK and across Europe. In spite of the fact that the two phrases have different meanings, they both safeguard investors from risky investments.
The definition of “Experienced Investor” contained in the Financial Services (Experienced Investor Funds) Regulations, 2012, dictates that an investor must be able to make an investment or simply read the company’s documentation. If you’re an experienced investor, you’re one of the following people or organisations:
(a) a person or partnership whose ordinary business or professional activity includes, or is reasonably expected to include, acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent, or the giving of advice concerning investments; or
(b) a body corporate which has net assets over €1,000,000 or which is part of a group which has net assets over €1,000,000; or
(c) an unincorporated association which has net assets over €1,000,000; or
(d) the trustee of a trust where the aggregate value of the cash and investments which form part of the trust’s assets is over €1,000,000; or
(e) an individual whose net worth, or joint net worth with that person’s spouse, is greater than €1,000,000, excluding that person’s principal place of residence; or
(f) a participant who has a current aggregate of €100,000 invested in one or more experienced investor funds; or
(g) a participant who invests a minimum of €50,000 in an experienced investor fund and who has been advised by a professional adviser to invest in the fund and the fund’s administrator has received confirmation of such advice; or
(h) a participant who is a professional client, as defined under the Financial Services (Markets in Financial Instruments) Act 2006; or
(i) a participant in a fund that has re-domiciled to Gibraltar where the Authority has permitted the inclusion of such participant either in respect of a specific fund or generally in respect of funds or a category of funds from a certain jurisdiction.
“This prospectus or memorandum does not constitute a general offer or invitation to the public to subscribe for the Securities of the Company other than Experienced Investors as so defined,” are a standard phrase in the prospectus and memorandum language.
Some Highlights
Several factors determine whether an individual is considered an accredited investor. Wealthy people have access to investments that most people don’t have access to. The investment vehicle bears the burden of demonstrating that an individual is an accredited investor.
High returns, exclusive investments, and better diversification are all advantages of being an accredited investor. Risk, minimum investment size, fees, and illiquidity are all disadvantages of being an accredited investor. Many countries have an “accredited investor” class that varies in terms of income, net worth, investments, and laws.
