Accredited Investors
As small, inexperienced investors, we are unable to take advantage of the full range of available investment opportunities. In an effort to protect small investors, the 1933 Securities Act enacted rules about which securities must be registered with the SEC and which can be offered privately. Because registration is time-consuming and expensive, companies with smaller needs may prefer to promote their investment opportunity privately, but because there is less oversight, the SEC allows only wealthy and experienced individual investors to participate, along with qualifying organizations.
As an individual you must meet two tests to achieve “accredited” status. First is the wealth test. To meet these qualifications as an individual you must have a personal net worth of over $1,000,o00, or an income for the past 2 years of $200,000 (single) or $300,000 (married). In addition, you must qualify as a “sophisticated investor.” Although taken on a case-by-case basis, sophisticated investors are generally those that meet the wealth test, with the exception of those whose homes comprise the majority of their net worth. For these individuals, the broker must ensure that they be financial literate and have the ability to properly weigh the risks of the investment.
It’s important to grow not only in wealth but also in financial literacy, and a strong base of financial education will serve an investor well in the future, allowing him to take advantage of more, possibly lucrative deals.
References
Accredited Investors. SEC.
Sophisticated Investor. E-trade.
The “Sophisticated” Investor Defense to Suitability Claims; More Frequently Raised Than Proven. James J. Eccleston, Esq. FinancialCounselor.com
4 Comments Add your ownSubscribe
1. Derek | March 17th, 2006 at 11:53 am
Investments into hedge funds are far riskier than you would think. Although the media might have you believe that they are “easy money”, the opposite is true. Most funds charge 2 & 20, meaning 2% of assets as a mangement fee, +20% of any upside. This is a huge drag to overcome, and in order for hedge funds to be profitable, you need to have some insight into the manager’s true skills. My wife and I recently invested into a distressed/event fund. It is too early to see how this investment does, but note that: (1) my wife knows the portfolio manager personally; and (2) my wife is a senior analyst at a distressed/event hedge fund and is highly skilled in evaluating these investments. Absent having this sort of insight, I think these investments are far too risky for unsophisticated investors. For most investors, I think you’re likely to get an underperforming return at best, and an implosion/fraud at worst. This is strictly caveat emptor stuff.
2. Jack Doueck, Stillwater Asset Backed Strategies | August 4th, 2006 at 4:43 pm
Does being an Accredited Investor actually make you a Sophisticated
Investor?
Robert Smith is 41, well educated having gone to Harvard and then Yale for
his masters. Lives in Minneapolis with his wife and two kids. Owns is
home, makes $150,000 a year and works hard as an analyst for a mutual fund.
Has $750,000 in savings, reads the Wall Street Journal every morning and
watches CNBC all day.
Jenny Burns is 21, skipped collage to pursue her “acting” career. Lives in
California, loves MTV and VH1, rents her apartment, watches Charmed and The
OC. Has never taken a business class, never read a business magazine or
paper and doesn’t understand the difference between an equity and
bond.thinks the stock market is like Costco. Last month she inherited $1.1
million dollars from her grandmother.
Guess who the “Sophisticated Investor” is under the law??? You got
it: JENNY.
Under the current “Accredited Investor” rules, Jenny is considered the
Sophisticated Investor and can invest in some of the best and brightest
hedge funds around, while Robert can not. For some strange reason the
government is under the impression that just because someone has money, it means that they must be able to understand and analyze investment choices!
There should clearly be an updating of the current rules and regulations
that more realistically reflects the true definition of a “sophisticated
investor” and takes into account knowledge, intelligence and education.
Jack Doueck
Stillwater Asset Backed Lending Division
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