Accredited investors are a category of investors who are considered legally eligible to invest in certain types of financial instruments. Thus they have the possibility to participate in investment opportunities reserved for professional investors. This status is reserved for individuals or entities with a high level of financial knowledge and experience. But also those who have the significant financial capacity to bear the risks associated with investments. In this article, we will explore what accredited investors are, who can become one, the pros and cons of this status. Furthermore, we will explore the tools accredited investors can access, and how one can become an accredited investor in various countries around the world.
Who is an Accredited Investors?
An accredited investor is an individual or entity that meets certain financial standing requirements set by the regulatory authorities in a given country. Obviously, these requirements vary from country to country. But in general, an accredited investor is a person or entity that has demonstrated a high level of financial knowledge. Also, people that have the financial capacity to bear the risks associated with investments can access this status. Moreover, the status of accredited investors authorize to invest in certain types of financial instruments and participate in investment opportunities reserved for professional investors. Obviously, this open new opportunities to us to diversify our portfolio.
Who can become an accredited investor?
The rules and requirements for becoming an accredited investor vary from country to country. In many countries, accredited investors must meet certain financial criteria, such as a minimum income or net worth, or have a certain amount of financial experience or knowledge.
I created a table to compare different requirements in various countries. At the day I write the post these are the requirements, thus they may change in future. Accredited investors are also known as qualified, experienced or High Net Worth investors in the various countries. The meaning is the same for this article as it concern us only in seeing the opportunities unlocked. Obviously, some taxation and/or legal liability requirements may change.
If not specified the same value is applied to individual or marital status.
Only 1 of the requirements is needed to became and Accredited Investor.
|Country||Annual Income||Net Worth||Financial assets|
|United States||$200,000 for the past two years (or $300,000 if married)||$1 million, excluding primary residence.|
|Canada||CAD $200,000 in the past two years (or CAD $300,000 if married)||CAD $5 million||CAD $1 million|
|United Kingdom||100,000 GBP||£250K beyond your pension fund assets and your private residence|
|Switzerland||CHF 500,000||CHF 1,000,000|
European Union has a different method to establish if you can became and accredited investor.
There are three tests to determine if an individual is an accredited investor. The first is a qualitative test, evaluating the individual’s expertise, knowledge, and experience to determine if they are capable of making their own investment decisions. The second is a quantitative test where the individual must meet at least two of the following criteria:
- Has carried out transactions of significant size on the relevant market at an average frequency of at least 10 transactions per quarter over the previous four quarters.
- Has a financial portfolio exceeding EUR 500,000.
- Works or has worked in the financial sector for at least one year.
Additionally, the client must state in writing that they wish to be treated as a professional client. At that point, the firm they wish to do business with must provide notice of the protections they may lose.
Pros and cons of being an accredited investors
Being considered an accredited investor offers some opportunities and benefits, but it also comes with some risks and challenges. Here are some pros and cons of accredited investors:
- Access to Restricted Investment Opportunities. Therefore, this may include investments in startups, venture capital, private equity and other high-yield investment opportunities. These opportunities may offer greater portfolio diversification other than potentially higher returns.
- Greater Investment Flexibility. Accredited investors often have more investment options than non-accredited investors. They may have the ability to invest in complex and sophisticated financial instruments such as derivatives, hedge funds, alternative investments. Accredited Investors can make combination of these instruments or invest with leverage or debt easily.
- Portfolio Diversification Ability. Being an accredited investor can allow for greater portfolio diversification. Thus, accredited investors may have access to a wider range of investment opportunities, which may offer greater risk diversification and better protection against financial market volatility.
- Recognition of financial knowledge and experience. Being considered an accredited investor can be a recognition of your financial knowledge and experience. Of course, this can be rewarding for investors who have invested time and energy into studying and understanding the financial markets and different investment instruments. Yes, a little ego doesn’t hurt, but it can also open doors for new people and improve your networking.
- Greater Bargaining Power. Accredited investors often have greater bargaining power in negotiations with fund managers and other financial industry professionals. Thus, it is done as they are considered sophisticated and well-informed investors. This can result in more favorable investment conditions and better trading opportunities.
- Risks associated with complex investments. Accredited investors may have access to complex and sophisticated financial instruments that involve higher risks than traditional investments. Failure to understand or properly manage these risks can result in significant financial loss. Pay Attention!
- Liquidity Constraints. Some investments reserved for accredited investors may have liquidity constraints. Thus, it means that it may be difficult or expensive to redeem or sell such investments quickly if you require liquidity.
- Possible lack of diversification. As accredited investors have access to more unique investment opportunities. Because of this investors may be tempted to focus a significant portion of their portfolio on higher risk alternative investments. This could lead to a lack of portfolio diversification and an increase in overall risk.
- Less regulatory protection. Accredited investors are generally excluded from some of the regulatory protections offered to retail investors. This could include less regulatory oversight and less legal protection in the event of litigation or financial loss. Accredited investors should therefore be aware of their rights and any regulatory restrictions that may apply to their investments.
Instruments that can be accessed as an accredited investor
As we said before, being an accredited investor can offer access to a number of advanced financial instruments and investment opportunities. So, explore more some of the key tools accredited investors can access include:
- Startup and Venture Capital Investments. They are investment opportunities in emerging companies with significant growth potential, but with also higher risks. Sincerely, I’m not a big fan of. On one hand, being an accredited investors doesn’t give the knowledge to understand the complexity of new business. On the other hand, if you worked in a sector for many years and possess an outstanding knowledge about it this can be a good option for you.
- Hedge Funds and Private Equity Funds. I don’t particularly like active funds, but hedge funds don’t have the goal of beating the market, but of keeping the value stable over time. In the next post I will elaborate on them better. In my opinion, beyond a certain threshold of net worth it is an excellent weapon to have in your ranks.
- Commercial Real Estate Investments. As I said in previous posts, I’m interested in Real Estate investments. Thus, being an accredited investor would give us access to private REITs. You will find more information in the Site tips.
- Investments Complex Instruments. High yield bonds, convertible bonds and other forms of financial derivative instruments are good example. These instruments may offer the potential for higher returns, but also involve new types of risks such as liquidity, leverage or creditor risk.
- International Investments. Accredited investors may have access to investment opportunities in international markets, both through mutual funds and direct investment in foreign securities. This can offer opportunities for portfolio diversification and exposure to emerging markets, but also carries risks related to currency fluctuations, local regulations and economic conditions in the countries involved.