The term “accredited investor” is used to designate those individuals or corporations who are allowed by laws governing securities that can be bought or sold as having the wherewithal to invest in hedge funds, angel investor networks, terminal partnerships and other high risk investments. An accredited investor can be a person who has more than a million in cash or it can be a fund that invests other people’s money like endowment or retirement plans.
Every country has their own criteria for what constitutes an accredited investor. If an investor’s main residence is in The United States, he needs to have one million dollars in net worth. If he can’t show one million dollars in net worth which literally means cash or saleable assets, he needs to show a yearly income of $200,000 for the past two years and, if married, he needs to show $300,000 in yearly income and business or employment that guarantees him that much for the year that he is claiming to be eligible to buy into a fund. The definition of the term was coined by a rule of the Securities Act of 1933.
The Securities Act of 1933, Rule 51 called Regulation D stipulates that an entity is seeking to be qualified as an accredited investor, the following financial considerations must be met:
An investment group needs to have more than 5 million dollars in total assets. An organization needs to have more than 5 million dollars.
A person involved as a partner in a corporation and whose net worth is connected with his spouse, needs to have one million dollars of net worth when wanting to buy into securities that demand only accredited investor qualifications.
A person whose personal income is more than $200,000 for the past two years or who has income connected with his spouse of over $300,000 for the past two years and who has the means to continue earning that much for the year that he is seeking to buy into a pre qualifying securities or fund can be allowed to purchase shares in funds and securities that specify only accredited investor status.
An investor or a group of investors who manage a trust can be designated as accredited investors if they haven’t formed their trust just to be allowed to purchase shares in a fund or other securities that are limited only to accredited investors.
The United States Securities and Exchange Commission on December 13, 2006, amended the meaning of “accredited investor” to include a new nuance to the term. The new term is “accredited natural person”. Those who meet this criteria can invest in hedge funds and private investment pools if they own $2.5 million in investments and qualified under the old rule. The reason being that inflation has eroded the meaning of one million dollars and assets as well as investments are required to adjust for inflation.
This new amendment to the old rule definition and requirements of accredited investor would limit the number of people in the United States who would now qualify.