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The definitions vary from around the globe, basically apart from institutional investors the term Accredited Investor usually refers to High Net Wealth individuals who are considered sophisticated enough to understand the risks of the investments they are undertaking. Catering to Accredited Investors allows investment managers to be less regulated than their peers who offer their products to retail investors as well. There is also some discrepancy in the use of terminology across the globe to define these types of investors. In some countries, such as Europe or Australia, these investors are known as Sophisticated, in others such as the US and Canada they are known as Accredited. In either case the main reasons for the existence of these definitions is to allow certain fund managers the freedom to take positions that are not restricted by the norms and regulations of Mutual Fund managers. Asset managers that cater to Accredited Investors are allowed to short sell assets, make widespread use Derivatives, trade or invest in Assets prohibited to regulated managers and hold highly concentrated positions. On the compliance side they are also usually exempt from extensive reporting and auditing requirements This clearly creates a more complex investment where the risks may not be easily understood by the broader retail public.
In the USA the term Accredited Investor is defined in The Investment Security Act 1940. Section 3(c)1 refers that an investor will be considered accredited when an individual has a net worth above $1 million excluding their primary property, or an annual income over the previous 2 years of $200 thousand or $300 thousand if married with the likelihood of earning the same in the current year. The SEC also mentions Sophisticated Investor as someone with enough financial and business knowledge to be capable of making an educated decision about an investment, although he may not meet the Accredited Investor requirements.
In Canada the definition of Accredited Investor runs along the lines of the 1940s Act in the US. An individual should have Net assets alone or with spouse of $1 million but net of related liabilities, or an individual with gross income of $200 thousand over the previous two years, $300 thousand if married, with the expectation to earn at least the same amounts for the current year.
Under the MiFID directive Accredited Investors known as “Professional Clients” are only institutions, Banks, Funds etc. However individuals can choose to be considered so if they meet two of the following three criteria;
- The client has traded 10 times per quarter in significant size and in the relevant markets over the preceding 4 quarters.
- The individual’s financial portfolio, including cash, is worth at least € 500 thousand.
- They state in a separate document from the contract they are aware of losing protections afforded to “Retail Clients”
There are two accreditations, one for Sophisticated Investor the other is Professional Investor.
A Sophisticated Investor is someone with assets of at least $2.5 million or income over the previous two years of $250 thousand. The Professional Investor is considered such when you hold a financial services license or you control or own assets of at least $10 million.
This country has two definitions for individual Investors to whom managers may sell less regulated products. 1) An Accredited Investor. 2) An Expert Investor. Although it also has a provision to determine an individual as Accredited at the governing authorities discretion.
- i) An individual with net personal assets of SGD 2 million, or foreign currency equivalent, the value of the primary residence may be included. Or other amount as the Authority may prescribe.
ii) An individual with an income over the previous 12 months of at least SGD 300 thousand, or any amount the authority may prescribe.
iii) Such other person as the Authority may prescribe.
- i) A person who is in a business involved in the capital markets whether acting as a Principal or as an Agent.
ii) A trustee acting within that role as the Authority may prescribe.
iii) A person such as prescribed by the Authority.
As can be seen the definition of Accredited or Sophisticated investor varies around the world, creating a lot of compliance work for Asset Managers who wish to attract investors on a global basis. For the investor it is important to understand if he/she falls under this category, as it will determine if more sophisticated investments are available, but it will also mean that protection offered to retail investors will no longer be in place.