Definition
An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor, and the consequences of being classified as such, vary between countries. Generally, accredited investors include high-net-worth individuals, banks, financial institutions and other large corporations, who have access to complex and higher-risk investments such as venture capital, hedge funds and angel investments.
Accredited Investor
An accredited investor is a person that fulfills the requirements set by the securities and exchange commission of a country. These investors are considered to be financially strong and have reduced need of protection that is offered by government fillings. Examples of accredited investors include banks, insurance companies, trusts, and employee benefit plan.
In the US the term accredited investor is described in Rule 501 of Regulation D of the SEC. Some of the requirements that must be fulfilled by investors to be considered as accredited include the following.
- A small business financial investment company, business development company, registered investment company, insurance company, and a bank.
- An employee benefit plan that is valued above $5 million or if the decisions about the plan are made by a bank, registered investment adviser, or an insurance company.
- A charitable company, partnership, or corporation, having assets that exceed $5 million.
- An individual whose sole or joint net worth is greater than $1 million at the time of making an investment or has assets except primary residence put that are put under management that is greater $1 million in value.
- An individual with net income greater than $200,000 in the past twenty four months or with joint income shared with spouse that exceeds $300,000 in the specified period with the likelihood of the same level of income in the current period.
- A trust having an asset above $5 million that does not deal with trading of securities.
Investors that fulfill the above criteria are said to be accredited investors.
Benefits of Accredited Investors
These investors don’t face a number of restrictions imposed by the SEC that are applicable to unaccredited investors. Moreover, they are allowed to take on greater risks as compared to traditional investors.
Due to high net worth, accredited investors are able to invest in high risk investment options that are restricted for regular inventors. The riskier investment option entails a higher growth potential that greatly increase the odds of the investor earning greater returns on investment. Some of the financial options that are open for accredited investors include commodity funds, hedge funds and certain public funds that are not open to regular investors. A company that limits its investment offer to accredited investors gains by not having to meet certain regulatory requirements.
Further Reading
- Unsophisticated Wealth: Reconsidering the SEC's Accredited Investor Definition under the 1933 Act – heinonline.org [PDF]
- Why the accredited investor standard fails the average investor – heinonline.org [PDF]
- The customer suitability regulation comparison of foreign financial products investment – en.cnki.com.cn [PDF]
- Statement of the financial economists roundtable: Crowdfunding – www.tandfonline.com [PDF]
- The Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition – papers.ssrn.com [PDF]
- The law and economics of hedge funds: Financial innovation and investor protection – heinonline.org [PDF]
- Public Interest Comment on Hedge Fund Investor Qualifications-The Definition of Accredited Investor in Certain Private Investment Vehicles – papers.ssrn.com [PDF]
- Do Female Investors Support Female Entrepreneurs? An Empirical Analysis of Angel Investor Behavior – papers.ssrn.com [PDF]
