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Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments, limited partnerships, hedge funds, and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment, or retirement plans.

In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year."[1] This rule came into effect in 1933 by way of the Securities Act of 1933.

In Canada, the same prerequisites apply, however one's net worth must be a minimum of one million dollars not including the value of the principal residence.

U.S. criteria

"The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a director, executive officer, or general partner of the company selling the securities;
  5. a business in which all the equity owners are accredited investors;
  6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes."[1]

Proposed new accredited investor class for hedge funds

At an open meeting on December 13, 2006, the U.S. Securities and Exchange Commission (SEC) voted to propose a change to the definition of "accredited investor" that, if adopted, would apply to offers and sales of securities issued by hedge funds and other private investment pools to "accredited natural persons". The proposal requires "accredited natural person" to be both "accredited investors" under the existing standards and own not less than $2.5 million in investments (as currently defined in the Investment Company Act for purposes of the Section 3(c)(7) exemption) on the date an investment is made. The $2.5 million test will be periodically adjusted for inflation.

The SEC release estimates that the accredited natural person definition, if adopted as proposed, would significantly reduce the number of U.S. households that are eligible to invest in private investment vehicles. By the SEC Staff’s calculation, approximately 8.47% of U.S. households currently qualify for accredited investor status under Regulation D. The Staff estimates that this percentage would drop to approximately 1.3% with respect to investments in private investment vehicles if the accredited natural person standard is adopted.

References

  1. ^ a b U.S. Securities and Exchange Commission on Accredited Investors
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