How Accredited Investor Laws Work Globally – the Good, the Bad, and the Ugly
An accredited investor is an individual or an organization authorised by law to buy non-enrolled securities provided that it meets one of the necessary requirements in terms of income, total assets, total worth, administration approval or work experience; depending on the work experience or domain.
The term as utilized by the Securities and Exchange Commission (SEC) alludes to investors (individuals, banks, insurance agencies, agents and trusts) who are economically eligible and require less protectionism from regulation revolving around securities.
A basic understanding of how accredited investors fit into the big picture is essential for anyone entering the investment game. Because of the risks involved in investing resources into under regulated securities, investors must be able to withstand major losses and have a working knowledge of how to confront such events. Most accredited investors like to pick reputed hedge fund managers to manage their investments.
So, there have to be some benefits to being an accredited investor, right? There are two distinct benefits of being one: firstly, accredited investors can diversify their portfolio and therefore minimise the risk involved. Secondly, accredited investments usually lead to higher long-term returns than securities offered on the stock exchange; or at least that is how they are meant to be.
Accredited investors have a variety of options to invest in and reap better-than-market returns. Some of the primary options include:
- Holding Company. A holding organization is an organization that claims a large number of stakes within certain companies; effectively running the strategic decision-making of these concerns. A holding organization does not deliver merchandise or administrations in itself, but is rather set up to own different endeavors and manage them effectively. These organisations present an opportunity for wealthy group of investors to have meaningful stakes in a diversified portfolio of companies from one or many different sectors.
- Seed Money. The term ‘seed’ implies that these are early stage investments that involve a great amount of risk and exponential rates of profits if the company or initiative being invested in becomes a success. Seed money enables a business to start it’s operations and maintain them until the point is reached where it can create its very own cash; or until the stage where further investment is required to take it to the second stage of development, as is usually the case in creative or ‘groundbreaking’ enterprises.
- Hedge Funds. There are incalculable quantities of businessmen and women with a great deal of cash, however they don’t discover a place to invest in.The essence of hedge fund investments is to encourage a few agents or certify speculators who gather their cash with the goal that an authorized organization can enable them to deal with these assets and guarantee that they get great profits for their venture.
As briefly outlined above, there is a curve to being identified as an accredited investor. This can take disqualify a large number of investors who are otherwise willing to accept the risks involved in investing in such ventures.
In the United States, the Securities & Exchange Commission has put forth 5 clauses in Rule 501 of Regulation D that delimit who can be labelled as an accredited investor. For individuals this means that one has to prove an annual income of $200k per annum (or $300k on joint basis) over the past two years. While such limits are set to protect investors, these nonetheless keep a large number of willing investors outside of the pool.
Then there is issue of managing risk with regards to unregulated securities. In a public statement, the Commissioner of the SEC pointed out: the definition of “accredited investors” is crucial to the protection of investors. The definition seeks in its essence to identify those individuals who are expected to be able to defend themselves and protect their interests.
How exactly does one objectively identify which security passes the scrutiny test? To address such issues, the SEC has created a database with guidelines for accredited investors. Here are some other instances which show that it’s not all gold for accredited investors:
- Complicated tax filings and rules. Tax filings for private investments can be quite demanding, particularly for individual investors. Additionally, legislation such as the IRISA rule further complicate sponsor-client relations by imposing restrictions on each.
- Private investments are relatively illiquid; these are long term investments that lock in your cash to the initiative. Additionally, and perhaps more worryingly, there is usually no market to resort to in case you wish to sell your stakes.
- Higher entry-level investments. Having the right financial standing is not enough; one needs to be willing to invest that money to be a viable private investor. Whereas investing in securities on stock exchange is something anyone the age of 18 or above with a few dollars can take part in; it is much tougher to become a private investor. Crowdfunding schemes, however, have made significantly addressed this problem in recent years.