Definition: Accredited Investor
Who is an Accredited Investor?
Accredited Investors are also known as Sophisticated Investors, Qualified Financiers or Professional capitalist. Generally, they are allowed to participate in specific unregulated securities offerings. Such Investors are money-wise sophisticated and able to withstand the threat of loss. Accredited Investors with special status are ready to assume the unique risks involved in unregistered securities.
The Securities Exchanges usually has two responsibilities; safeguarding investors and helping forms in raising capital. It essentially helps the markets to accumulate capital. It thus becomes indispensable for the exchange to tie up high-risk, high-reward prospects with appropriate investors. It is where Accredited investors fit.
In the US- The term, an accredited investor is defined in General Rules & Regulations, issued by US Federal Government. As per definition in the regulations, a common category is individuals with an annual income of over USD$200,000 in each of the two most recent years. Other Individuals having joint income with a spouse above US$300,000 or net worth or collective net worth beyond US$1 million, excluding the value of the primary residence. Definitions for trusts, banks, private businesses, business directors of the issuer, employee plans, retirement plans have also been detailed in the regulations.
In Australia- A Sophisticated or Wholesale Investors are legally defined in the Corporations Act 2001. The investor must have over AU$250,000 of gross income for the last two financial years. Even investors who own over AU$2.5 million in net assets are Accredited. There are a few other possible definitions for entities like a company or trust that is nominated as sophisticated, just like a suitably experienced investor.
New Zealand has similar criteria for so-called Qualifying Investors. Other countries like the UK, Singapore, India and Canada also have laws defining Accredited, Sophisticated or Qualified Investors.
The common thing in all regions is that only these investors have access to investment chances that are exclusive wholesale offers or alternative financial instruments.
- Accredited Investors are persons or firms who enjoy a special status assigned under SEC regulations.
- These investors can participate in unregistered securities offerings by Fund houses or companies and exclusive wholesale offers.
- They are Sophisticated Investors enjoying exclusion from disclosure norms.
Frequently Asked Questions (FAQs)
How do Investors become Accredited?
There is no formal process that individuals or institution can follow and become an accredited investor. The onus of verifying whether an investor qualifies or has accreditation lies with the seller of unregistered Financial Instruments.
The merchant is required to verify the status of investors interested in buying securities. It is mandatory for issuers of securities to undertake various status verification methods. Often investors are required to fill out questionnaires. They provide details like annual income, net worth and association details with the issuer. Supporting documents are needed for authorization. The Accredited Investors submit documents like financial statements, accounting information, and tax returns.
Some issuers may also need a credit report and reviewed statements from auditors, financial advisors or attorneys.
Why do regulations apply to Accredited Investors?
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Sophisticated investors, therefore, are the ones who can make huge returns if successful or endure losses if the unregistered securities fail.
Why do markets need Accredited Investors?
Any market regulatory body is tasked with dual responsibilities. It has to promote investment and also safeguard the investors. Therefore, regulators need to endorse investments in risky projects also though not at the cost of investors.
The security offering businesses can sometimes be prospective multi-baggers. Also, sometimes they are highly risky; they may be focused on activities without any marketable product and a high chance of failure. If such investments become successful, investors receive huge returns; but, they also carry high probability of loss. Only knowledgeable or Rich investors thus become eligible to bear these risks.
Given this, regulators also need to protect every investor—even those who may not have any financial capacity to absorb high losses or understand risks. Therefore, establishing rules for accredited investors and allowing only them access to unregistered securities is a must.
Why Security Issuers prefer Accredited Investors?
- Security issuers need to register all securities offered with the regulators unless they are exempt from registration.
- Registration is difficult, costly and time-taking, thus issuers often look for exclusions.
- Therefore, companies seek Accredited investors when they don’t want large public participation.
- Generally, unregistered security deals involve a limited number of sophisticated investors buying a new securities issue that is exempt from registration.
- The issuers thus reduce the cost of issuances and avoid the traditional registration process for public allocations.
- By placing limitations on who can invest in unregistered securities, regulators seek to reduce the hassle of attending retail participants in a complex financial instrument.