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What Does it Take to Become an Accredited Investor?

Stockhouse Editorial
1 Comment| May 1, 2019


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There is certainly a high degree of truth to the age-old phrase, “It takes money to make money.” And Accredited Investors certainly have more opportunities to do so than non-accredited investors. So who exactly is an Accredited Investor and how does one get to become one?
 
Accredited Investors are a special class of investors who are able to access investments that regular investors are not. Because they meet provincially- administered Canadian securities regulatory criteria for wealth and sophistication, Accredited Investors get the green light to invest in vehicles such as private placements
 
In order to become an Accredited Investor, certain income or net worth requirements must be met. This article will help define what an Accredited Investor specifically is and explain how to become one. It will also explore what an Accredited Investor can do and what rules they must follow.
 
Accredited Investors include both institutional and retail investors with a high level of investment knowledge and acumen.
 
In Canada, an ‘Accredited Investor’ is defined by the various provincial securities commissions throughout the country. The short version of this definition includes, but is not limited to, the following qualifications:
 
  1. Certain institutional investors
  2. If you alone, or together with a spouse, own financial assets worth more than $1 million before taxes but net of related liabilities and excluding your primary residence.
  3. If your net income before taxes exceeded $200,000 in both of the last two years and you expect to maintain at least the same level of income this year.
  4. If your net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and you expect to maintain at least the same level income this year.
  5. If you alone or together with a spouse, have net assets of at least $5,000,000, which can include your primary residence.
  6. If you are currently, or were, a registered advisor or dealer, other than a limited market dealer.
 
The long definition of Accredited Investor can be found in National Instruments 45-106 – Prospectus Exemptions. Needless to say, it is not exactly ‘light reading.’ So if you don’t have time, or don’t have the legal background to read through NI 45-106, you’ve come to the right place. At Stockhouse, we’ll try and simplify it for you.
 
 
The quick and easy definition of an Accredited Investor is “a person or entity that can purchase securities by satisfying one of the financial tests regarding income, net worth, asset size, or have governance status or certain professional experience.”
 
 
The principles of what constitutes Accredited Investor status varies, but we’ll go through the main examples and explain how they work.
 
Accredited Investors need to meet these requirements as they are eligible to invest in exempt securities that often come with higher risks. Their financial situation or investing experience are seen as being necessary to handle and understand these increased risks. Remember, there is no formal accreditation process. If you meet the criteria, you may invest in private companies as an individual.
 
The Accredited Investor Exemption is a way companies and investment funds raise money without being required by securities laws to file a prospectus in Canada or a registration statement in the U.S.
 
Securities regulators in both countries have stated that it is not sufficient for issuers/dealers to simply rely on an investor initialing or checking a box in an Accredited Investor Certificate (or a schedule to a subscription agreement) indicating that the investor is, in fact, an accredited investor. In Ontario, the Ontario Securities Commission (OSC) Staff Notice 33-735 states the issuer/dealer selling the security is responsible for determining whether an investor meets the definition of accredited investor and is therefor eligible to participate in the private placement. According to the OSC, the issuer/dealer must have “sufficient information to determine whether the [purchaser] qualifies as an Accredited Investor”.
 
While Accredited Investors objectively have more wealth than the average person, they tend to, generally speaking, also maintain a higher level of investment and financial knowledge.
 
While becoming an Accredited Investor comes with the same inherent financial risks experienced by any investor, it can also confer certain advantages in wealth building – higher rates of return, higher yield, and diversification are the three main reasons for investing in private placements.
 
As such, these drivers can potentially compress time in generating wealth and shield the investor from market swings with diversification and lower volatility.
 
And, as always, an educated Accredited Investor simply has more options, and more options is a good thing. It all depends on the investor to make the right choices.
 
 
Please note – as of 2016 many provinces in Canada now allow non-Accredited Investors to invest in private markets, under specified limits.



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