Accredited Investors: Who they are and the requirements they meet

Destin Rice, MGT 386, November 25, 2008

To gain success and follow up by holding the gains or continuing to excel in excellence, the business world relies heavily on support from investors. Accredited investors are investors who “invest in certain types of higher risk investments, limited partnerships, hedge funds, and angel investor networks” (Wikipedia, 2008).

While these investors are recognized as being risk takers and as being “financially sophisticated,” they generally fall into other categories (Bonds Online, 2006). Accredited investors “generally include wealthy individuals and organizations such as corporations, endowments, or retirement plans” (Wikipedia, 2008). The U.S. Securities Exchange Commission goes even further to state that, “accredited investors may include banks, insurance companies, registered investment companies, business development companies, or small business investment companies” (2008). They may also include “charitable organizations, corporations, or partnerships with assets exceeding $5 million, 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 of securities or a natural person with the 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” (U.S. Securities Exchange Commission, 2008).

Before dealing with accredited investors, one should consider the advantages and disadvantages of these investors as well as several questions that should be asked to the investors. One should immediately realize that there are numerous advantages with dealing with accredited investors. Because accredited investors are typically “company insiders and rich people with areas of expertise in corporations and contracts,” they may provide numerous benefits to a company or corporation (CNN Money, 2008). Accredited investors are “generally either wealthier investors or individuals with access to more information about a company and may be less burdensome when raising money” (CNN Money, 2008).

Examples of questions that companies and individuals dealing with accredited investors may ask themselves as well as the investor include:

• What are the state’s security laws?
• What are the federal securities laws?
• How much money are we raising?
• How much money have we already raised?
• How many investors do we plan to target?
• What documents will be provided to our investors?
• What types of filings have been completed?
• What kind of company is this accredited investor?
• Is this an employee benefit plan?
• Does the plan have total assets in excess of $5 million?
• Does the bank, insurance company, or registered advisor make the investment decision?
• Is this a business in which all the equity owners are accredited investors?
• How much is the individual’s net worth?
• What is the natural person’s income? Joint income with spouse?

Works Cited

BondsOnline (2006). Investors. Retrieved November 25, 2008, from
http://www.bondsonline.com/Accredited_Investor_def.php

CNN Money (2008). Accredited Investors: Do you need them? Retrieved November 25, 2008 from, http://askfsb.blogs.fsb.cnn.com/2008/07/23/accredited-investors/

U.S. Securities and Exchange Commission (2008). Accredited Investors. Retrieved
November 25, 2008 from, http://sec.gov/answers/accred.htm

Wikipedia (2008). Accredited Investor. Retrieved November 25, 2008 from,
http://en.wikipedia.org/wiki/Accredited_investor