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Accredited Investor

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.

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.

  1. A small business financial investment company, business development company, registered investment company, insurance company, and a bank.
  2. 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.
  3. A charitable company, partnership, or corporation, having assets that exceed $5 million.
  4. 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.
  5. 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.
  6. 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]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

Why the accredited investor standard fails the average investorWhy the accredited investor standard fails the average investor
heinonline.org [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

The customer suitability regulation comparison of foreign financial products investmentThe customer suitability regulation comparison of foreign financial products investment
en.cnki.com.cn [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

Statement of the financial economists roundtable: CrowdfundingStatement of the financial economists roundtable: Crowdfunding
www.tandfonline.com [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

The Unsophisticated Sophisticated: Old Age and the Accredited Investors DefinitionThe Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition
papers.ssrn.com [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

The law and economics of hedge funds: Financial innovation and investor protectionThe law and economics of hedge funds: Financial innovation and investor protection
heinonline.org [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

Public Interest Comment on Hedge Fund Investor Qualifications-The Definition of Accredited Investor in Certain Private Investment VehiclesPublic Interest Comment on Hedge Fund Investor Qualifications-The Definition of Accredited Investor in Certain Private Investment Vehicles
papers.ssrn.com [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …

Do Female Investors Support Female Entrepreneurs? An Empirical Analysis of Angel Investor BehaviorDo Female Investors Support Female Entrepreneurs? An Empirical Analysis of Angel Investor Behavior
papers.ssrn.com [PDF]
… scope of this Note to comment upon the potential effect of the economic crisis on … Commission recognized that in practice, "most hedge funds sell only to investors whose wealth exceeds that required to meet the standard established for accredited investor status." SEC …



Q&A About Accredited Investor


Who are SEC- and state-registered investment advisers?

SEC-registered investment advisers are those who have registered with the U.S Securities and Exchange Commission (SEC). State-registered investment advisers are those who have registered with their respective states.

How does one qualify as an accredited investor based on knowledge, experience or certification in addition to income or net worth?

Knowledgeable investors must possess specific knowledge about investments which includes understanding concepts such as risk tolerance, diversification, liquidity and volatility. Experience investors must have relevant investing experience which includes working in finance for at least two years. Certification investors must hold specific certifications from organizations such as CFA Institute, Chartered Financial Analyst (CFA), Certified Public Accountant (CPA) or Certified Valuation Analyst (CVA). p html ""

Where can you find information about accredited investors in the US?

You can find information on accredited investors in rule 51 of regulation D of the SEC.

Who can be considered as knowledgeable employees of a private fund?

A knowledgeable employee of a private fund is an individual who works for the private fund and has been employed by the same company for at least two years.

What is an accredited investor?

An accredited investor is a person that fulfills the requirements set by the securities and exchange commission of a country.

What does Rule 51 require for an individual to be considered as an Accredited Investor?

The individual must have a net worth greater than $1 million or have income greater than $200,000 per year for two consecutive years.

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