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Being an investor involves risks but also great potentials. After all, investing in securities is a great way to grow your financial assets. However, some specific individuals or entities might have the means and opportunity to amplify the general investment strategy by allocating their assets to invest in high-risk investments. To abide by the SEC’s purpose of protecting the general investing public, a select type of investors called “Accredited Investors” limits the kind of people to access high-risk investments.

What is an Accredited Investor?

An accredited investor is a special status conferred to certain investors under financial regulation laws. These investors are generally high-net-worth individuals and entities, such as corporations, banks, and financial institutions. These investors have access to complex and higher-risk investments, including but not limited to venture capitals, hedge funds, or angel investments. Moreover, accredited investors are expected to have knowledge and experience in financial and business affairs to make informed decisions on their investments. These criteria are made because the investment offerings they are exposed to are not SEC-registered or not subject to other SEC-registered investment rules.

How Does a Natural Person Qualify to Be An Accredited Investor?

A natural person pertains to being a living individual. For a natural person to be considered an accredited investor, they must fit one of the following criteria:

 

How Do Other Entities Qualify to Be An Accredited Investor?

For a trust to be considered an accredited investor, its total assets must be over $5,000,000, not formed specifically to purchase the subject securities, and whose purchases are directed by a sophisticated person. The term sophisticated person means that either that individual has sufficient knowledge and experience in financial matters to evaluate the merits and risks of the prospective investment, or the company or private fund offering the securities reasonably believes that the individual has these credentials.

Whereas other entities can be considered accredited investors if their total investment is over $5,000,000 and not formed to purchase the subject securities specifically; or if the entity’s equity owners are all accredited investors.

How Does an Investor Calculate Their Net Worth?

To determine if you qualify as an accredited investor, you need to calculate your net worth to see if you fall within the $1 million criteria at the time of the sale of the securities. The $1 million thresholds can either be your assets, or shared with your spouse, or an equivalent of a spouse. The property included in this calculation also does not need to be held or acquired jointly with your spouse or spouse equivalent.

To calculate your net worth, add up all your assets and subtract all your liabilities from that number, of which the sum is your net worth value. Note that your primary residence should not be included in the calculation.

What is the Advantage of Being an Accredited Investor?

An advantage of being an accredited investor under federal securities law is that they are the only persons who may participate in specific securities offerings. These certain securities offerings may include hedge funds, venture capitals, and angel investments. These types of investment offerings can offer lucrative profits.

What is the Disadvantage of Being an Accredited Investor?

However, a disadvantage of being an accredited investor is the assumption that they are financially sophisticated. Thus, they are generally thought of to sustain the risk of loss that they are not afforded the protections that come from a registered offering.

The securities offerings limited to accredited investors involve unique risks since they are not registered with the SEC and are not required to make prescribed disclosures to the accredited investor.

If you are an accredited investor or need help in navigating your financial assets and interests as an accredited investor, call us at (212) 203-9300 or emails us for a free consultation. Our experienced securities attorneys can help you determine if you are an accredited investor and understand the advantages and risks of being an accredited investor.

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