If you are looking to invest, the term accredited investor will pop up now and then. An accredited investor is someone who is considered to have the investment savvy or has the knowledge to invest in complex and high risk investments. These investments may carry higher risk but they also come with higher returns.
Below are the requirements to become an accredited investor:
You can tell right away that being an accredited investor is not easy. Either, you earn a high income or you have a really high net worth. Both requirements are pretty much outside the reach of most people. The last I checked, the average salary in Canada is about $50k.
Being an accredited investor opens up a lot of investment options. Below are just a few projects that require investors to be accredited:
There are a number of projects that require investors to be accredited:
Brightspark Blog – an investment vehicle into tech start ups.
R2 Crowd – A real estate crowd
Hedgeco.Networks – Service provider for the hedge fund industry
In my humble opinion, the accredited investor doesn’t really make sense. What if the average investor is savvy and knowledgeable enough to invest in high risk ventures, but they just don’t meet the requirements of being accredited. We are penalizing a lot of investors here. Also, a business looking to raise money won’t be able to raise as much capital because by law they can only attract accredited investor money.
I do get the point that the accredited investor label is meant to protect against fraud, and there are a lot (7 common investment scams). One way to determine investment savvy is by judging their income levels, because if they are smart enough to earn $100K a year, they must know something about investing. However, this didn’t stop wealthy investors and pension funds from losing their money in Madoff Ponzi Scheme.
In recent years, progress has been made to make it easier for non-accredited investors to invest.
In the US, the SEC (Securities and Exchange Commission) is making it easier for non-accredited investors to invest by allowing them to buy into equity crowdfunding / real estate crowdfunding / or peer to peer lending. In early 2016, investors in Ontario with at least $75,000 in annual incomes or $125,000 can now invest in private capital markets.
To a degree, investment opportunities are opening up but this also means the onus is still on the individual investor to see what is right for them though.
I hope this explains what accredited investors are. It isn’t a perfect way to protect investors from fraud but we have to live with it.