Accredited Investors

A lot of people have questions about some really "neat" investment opportunities that they may have heard about - you know the kind, the ones with 35%+ ROI!

And somewhere in the fine print it says that you must be an "Accredited Investor". What the heck is that all about?

Well, the Securities Exchange Commission was established (among many other things) to minimize the number of disreputable investments being offered to the general public. As such, any investment being offered has to follow some clear reporting requirements and register with the appropriate departments before being allowed to offer the investment. The resulting scrutiny has worked very well to reduce the number of "scams" that were floating around.

On the other hand, some investors want to test their skills and luck by finding opportunities that have spectacular rewards to go along with the spectacular risks. Usually, these opportunities only have a short window for investment, and as such, don't really have the time to go through all the SEC processes. In response to this demand a designation (and associated disclaimer) was created, that of "Accredited Investor".

Simply stated, an accredited investor waives their right to whine about "losing it all" if the investment opportunity doesn't pan out - for any reason.

So, Smokey Says that if you want to play in the unregulated marketplace make sure you understand the risks and are able (financially and emotionally) to survive the fallout if your choice doesn't return the "pot o' gold" you were wishing for. Be aware that you are the one responsible for "self-declaring" your status. No one else cares about your money as much as you.

The details of the SEC information are reproduced below.

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as "accredited investors."

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

1. a bank, insurance company, registered investment company, business development company, or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities;
5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.