An accredited or non-accredited investor is primarily the jargon used to gauge the net worth of an investor. The defining rules are country-specific, which are issued by the investment authority, security and exchange commission, capital market authority and/or any investment regulatory body.
In the USA, it is ‘The U.S. Securities and Exchange Commission (SEC); in the European Union, it is ‘The Financial Services Action Plan (FSAP) under a broader umbrella of European Union law, which is generally known by its predecessor ‘The Markets in Financial Instruments Directive.’
In Canada, in the absence of a federal regulatory body, various securities commissions of the provinces have the responsibility of laying down the definitions and criteria for an accredited investor. The list goes on in different parts of the world.
The accredited investor is the one who meets specified criteria of their net worth, whereas anyone falling short of that criteria is designated as a non-accredited investor.
The purpose of the regulatory definition of being an accredited or non-accredited investor is to create an investment environment that suits all classes. It helps individuals and corporations to make their own informed investment decisions and also to safeguard the small investors.
There are certain laid down criteria in the USA which must be met to qualify as an accredited investor. The Securities & Exchange Commission is the regulator for- among other activities- investments. Broadly and simply speaking, certain entities, under regulation D, Rule 501, fall into the category of accredited investor:
- Any firm, company or corporation, charitable and commercial entity, exceeding US Dollars 5.0 Million is an accredited investor, such as:
- The financial institutions, namely: banks, investment companies and insurance companies.
- The pension, retirement and provident schemes, benefit plans or any such trust.
- All the directors and executives and partners, who manage and sell securities through a registered entity. Moreover, all the shareholders in a business or firm, who by virtue of individual definition are accredited investors; that entity is also an accredited investor.
- Individuals who have a net worth, alone or jointly with their spouse, of the US $ 1.0 Million or more, but excluding the expected market value of the primary residence, at the time of investment activity or the right to exercise as an accredited investor.
- Individuals with income exceeding US$ 200,000 annually either as a single legal natural person or exceeding US$ 300,000 annually jointly with a spouse, in each of the two most recent years with a reasonable expectation to achieve the same in the current year.
- A trust whose assets exceeds US$ 5.0 Million.
There are certain complex definitions, explanations and clarifications that have been enumerated in the regulations, which will have to be adhered to during the verification process. You will need a qualified accountant to work on your net worth. The qualification is subject to the due process of verification, which is specified by the SEC in the USA under 506, C.
The verification and certification of being an accredited investor have to be carried out by a third party, mostly CPA, audit & accounting firms, attorneys-at-law. You may have to submit specific documentation like tax returns.
If you wish to be an accredited investor, you will have to meet one of the laid own criteria in your jurisdiction.
You are obviously a non-accredited investor if you do not qualify or fail to meet one of the above criteria. The majority of investors globally fall into this category. Non-accredited investors are also called retail investors. Such investors look for other avenues of investment to suit their financial profile or may join hands to create a registered fund that qualifies to be an accredited investor.
Benefits and drawbacks of being either
The underlying reasoning behind assigning a juridical person as an accredited investor is that that they ought to possess required financial know-how, awareness of the risks involved and have the financial means to withstand the possible losses.
Being an accredited investor gives you open season on opportunities that could be financially beneficial for you, including high risk-high return investments; you may opt to participate in the initial public offerings (IPOs), mutual and hedge funds, real-estate, syndications, crowdfunds, and cryptocurrency investments.
In regards to peer to peer real estate investing, research from dyernews.com/crowdfunding-real-estate-investing-platforms/ shows that most of the real-estate syndications and crowdfund are presently the playground of accredited investors, however, in recent years non-accredited investors have been finding openings in that area.
The downside is that such investment activities are not under the regulatory eye of the SEC, so the risk appetite and its ramifications are the sole responsibility of the investor. The investor has to carry out the due diligence, determine the risk factors and decide how much you can chew, swallow, and digest whatever is on offer.
Non-accredited investors are not necessarily out of the game though; they can pool together through a verifiable trusted third party to invest on their behalf; it is called in the jargon ‘crowdfunding’, which may cover a wider area of investment, including equity, real estate and peer-to-peer (P2P) lending.
The level of investment by a non-accredited investor is regulated, which is generally percentage-based to safeguard the non-accredited investors from the high risk-high return game.
The SEC had passed certain regulations to provide a window of opportunity of investments by the non-accredited investors. Many enterprising platforms are, today, available for non-accredited folks to enter the market with the much lesser threshold. Rule 501 of Regulation D of the SEC was designed to protect the small investors from the inherent risks that come with many classes and complex instruments of investments hence the restriction.
Such restrictions allow non-accredited investors to limit their level of investment, the threshold of which is directly related to your net worth.
After having understood the difference between the two investor classes and the risk and reward involved, you are better advised to make your investment decisions prudently with extensive research and expert advice. Your own risk appetite and the awareness of possible value addition or reduction are wise factors.
Interesting related article: “What is an investor?”