With over 12 million estimated accredited investor households in the United States as of 2016, an increase of over 2 million since 2013, wealthy individuals have become an increasingly important source of financing for companies in recent years due to their increasing numbers and thanks to more flexible regulations which have made private placements easier than ever.
Signed into law by President Obama just a few weeks before 4/20 in 2012, the Jumpstart Our Business Startups Act, a.k.a. JOBS Act of 2012, altered the rules for private placement offerings by enabling businesses to more aggressively promoting its offer to accredited investors, but the credentials an investor must fulfill so as to be considered an accredited investor has remained unchanged for years.
Accredited Investor Standards
Whether you’re an investor that’s considering an opportunity that’s only available to qualified accrediteds, or you’re a business owner that is looking to raise capital to grow more rapidly, it can be extremely important to have a clear understanding of who (and what) qualifies as an accredited investor, and who/what doesn’t qualify as an accredited investor.
The current qualifications to be considered an accredited investor are based on net worth and yearly income for a person or household.
- Annual income for someone is set at $200,000 for 2 years with reasonable certainty that it’ll continue, or, alternatively, a joint income of $300,000 for a household.
- The net worth threshold is set at $1,000,000.
Benefits of Being an Accredited Investor
With very few drawbacks, the perks of being an accredited investor include access to a wider range of investment options through private placements and more. Smaller, private companies can often offer investors higher potential gains.
In fact, being an accredited investor in the cannabis sector is arguably more beneficial than being an accredited investor in any other sector given the increased selection of opportunities and the ability to participate before the companies go public.
Sure, non-accredited investors can invest in private cannabis companies too, there are just far fewer deals to choose from due to regulatory restrictions. Also, from the perspective of the company raising money, the limitations on raising capital from non-accredited investors under a Reg. CF or Reg. A structure which allows it can be cumbersome if not all-together prohibitive of the end goal.
Drawbacks of Being an Accredited Investor
While there are no real drawbacks to being an accredited investor, private placement investments can oftentimes carry more risk than public company investments.
Due to the minimal disclosures required by law, accredited investors are expected to be savvy enough to perform their own due diligence and determine their own goodness of fit. That being said, as you probably have noticed, the official accredited investor qualifications say nothing of the experience or comprehension level of the investor. These are strictly number based qualifications.
Should Qualifications Be Tightened Or Relaxed?
As noted above, the official definition of “accredited investor” has not changed in quite some time. Its outdatedness, combined with the fact that the perks of being an accredited investor are substantial, to say the least, has meant that public demand for an alteration to the official definition of accredited investor is growing.
A part of their reasoning behind the SEC’s considerations for potential adjustments to the accredited investor qualifications is that economic conditions have altered significantly since these credentials were first put into place.
Based on a recent article in Forbes, lots of business leaders in the up and coming crowdfunding stadium appear to agree that, if any modifications must be made in any way, qualifications should just be relaxed. This would basically mean that more people or investment groups would be able to participate.
New crowdfunding initiatives are already enabling investors to join in on the action with reduced financial conditions, offering a wider pool of accredited and non-accredited investors to raise capital from.
The debate over inclusiveness hinges on the notion that the existing accredited investor requirements actually protect the interests and safety of the investors regardless of its limitations on capital raising initiatives. This focus on investor protection is exactly why some have argued to raise the accredited investor qualification standards.
SeedInvest, a crowdfunding platform specializing in linking accredited investors with worthy startup companies, expects that should the requirements be raised by the SEC, the number of qualified investors could drop to as low as 3.7 million accredited investors which could hurt financial growth and job creation.
As the debate wages on between investor watchdogs and capital market intermediaries as to whether or not accredited investor qualifications should change, the perks remain the same. Let us know what you think about the requirements in the comments below. In the meantime, be sure to subscribe to updates here so you never miss an important development.
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