Accredited Investor Definition and Purpose
An accredited investor is a high net worth person with assets typically exceeding 1 million dollars, and or income of $200,000/year or more in the last two years. The specifications for accredited investor status varies by country, and such status is also applied to companies and organizations.
How to qualify as an Accredited Investor
- In the US to qualify as an accredited investor you have to have professional knowledge or certifications and a net worth of at least $1 million, excluding their primary residence. Or, the person has annual income of at least $200,000/year (or at least $300,000/year when combined with a spouse) over the last two years. Or, a person (alone or with a spouse) who has net assets of at least $5 million.
- In Canada to qualify as an accredited investor you have to have a net worth of at least $1 million, alone or combined with a spouse. Or, the person has annual income of at least $200,000/year (or at least $300,000/year when combined with a spouse) over the last two years, and has reasonable expectation they will make more than $200,000 (or $300,000 with a spouse) this year.
- Other countries have similar specifications, in their own currencies.
- Others who are typically considered accredited investors include registered advisers or dealers under securities legislation, trusts, banks, insurance companies or companies and charities with assets exceeding $5 million (may vary slightly by country and currency).
The Purpose of Accredited Investor Status
In the financial world some products are only available to, or offered to, accredited investors. This is because accredited investors are also considered “sophisticated investors.” Sophisticated investors have shown an ability to make money and are therefore more likely to understand complex financial products and can withstand the potential capital loss in the event the investment doesn’t work out. Financial product offerings to accredited investors don’t need to go through the same scrutiny as a financial product offered to the average investor, since regulators assume sophisticated investors can more readily understand a product and/or withstand a financial loss compared to an average investor.
The above is the regulatory stance, but accredited investors aren’t always investment savvy. An accredited investor may have acquired their money through acting, a lottery, inheritance, or any number of ways not necessarily related to investing. Therefore, accredited investors are not necessarily better equipped to understand a financial product or investment, but are more equipped to handle potential losses than an average investor (although this may not always be the case either).
To help remedy the problem of unsophisticated-accredited-investors the US Securities and Exchange Commission has proposed a new definition called “accredited natural person.” The definition would mean the accredited investor–when purchasing certain types of investments–must have no less than $2.5 million in investments, thereby assuring that the accredited investor does have significant investment and investing experience.
Accredited investors can be approached by individuals and companies about financial products for which a prospectus may not be available. A prospectus is the legal document which lays out what a financial product or investment is, as well as its risks. This due diligence is not always required when dealing with an accredited investor. The accredited investor is assumed to be sophisticated enough to do their own research and verification of the investment, and can handle the loss if they choose not to research the investment or it turns unprofitable.