ExecuSpeak Dictionary: Accredited Investor
PHILADELPHIA ( TheStreet) -- What does it take to become an accredited investor? Is it akin to an accredited financial adviser who might take a test? Is it similar to an accredited educational institution that has been assessed by an accreditation organization? Or can it be compared with an accredited physician with additional years of training?
None of the above.
An accredited investor is defined by the U.S. Securities and Exchange Commission as an individual or an organization that ought to know better. Another way of putting this is, "buyer beware."
Let's get technical for a minute. An accredited investor is an individual with more than $1 million in assets (not including their home), or income over $200,000 per year for multiple years or a bank or an organization with more than $5 million in assets. This is not the complete list, so a bit of a disclaimer is required.
Yes, there is a list of criteria in the code. But the end result of all the legalese is a sense that this group represents those that should be: able to withstand the shock of losing the money invested; and/or have the capacity to evaluate investments on their own and thus might not need, want, or appreciate the protections the SEC has set up for the rest of us. The idea is that those who would be considered non-accredited investors might include smaller and/or unsophisticated investors who should not be allowed to invest in highly risky investments.
Are all non-accredited investors naive and unsophisticated? No. Are all accredited investors savvy and sharp? No. But the regulations aren't there to make subjective distinctions. Ultimately, the regulation's result is to define two distinct markets.
When selling securities, financial institutions have to register the securities with the SEC, unless they state they are selling to "accredited investors" and are "exempt." Exempt in that they ("they" meaning the financial institutions offering the security) don't have to register all the details of their offering with the SEC. This is where hedge funds, alternative investments, high-yielding funds, angel funds, venture funds, etc., fit into the picture. Financial institutions have more freedom as to what products and services they can sell an "accredited investor."
When reading about the large number of lucrative investment options available to the wealthy, remember the two key elements that are not being explicitly stated: The word "wealthy" is being used instead of the phrase "accredited investor," and the accredited investors are being offered "exempt" securities.
The exempt securities offered to accredited investors are just another way of demonstrating the financial industry truth of "high risk, high reward."
Carol Heiberger is the author of ExecuSpeak Dictionary. Her industry experience includes positions with Ford, Bell Atlantic (now Verizon) and a large energy utility. Her clients have included government entities, not-for-profits and businesses of every size. She has served as the COO of a start-up CATV/ISP company, director of operations and as an adjunct assistant professor for an MBA program. Her volunteer work includes service as a SCORE business counselor and on the loan committee for a microlender. Her education includes an MBA from Wharton. ExecuSpeak Dictionary is the result of her experience in industry and consulting and teaching. She can be contacted at Carol@execuspeakdictionary.com.