The accredited investor requirements set forth by the SEC restrict the ability of the public to invest in unregistered securities until the prospect investor conforms to certain net worth or income requirements. Stated in another way, the SEC reserves private, riskier investments to more wealthy and presumably more knowledgeable and sophisticated investors.
Ensuring the Investor Has Enough Wealth to Sustain a Los
The accredited investor rules are in place to ensure individuals and entities possess sufficient financial resources and knowledge to handle higher-risk investments safely. The types of investments available to accredited investors include venture capital funds and private company shares in advance of an initial public offering (IPO). These riskier investments have the potential to generate a significant amount of wealth. The SEC has established rules to help ensure the persons and entities investing wealth into these opportunities are capable of absorbing the losses if the investment fails and the expertise to evaluate the risk in the first place.
Protection Against Fraud or Misleading Opportunit
Another important reason for the accredited investor requirements is to protect against an increased risk of fraud or becoming misled into investing money into an unsound business opportunity. This is where having sophistication or experience as an investor becomes important.
Ensuring the Investor Can Vet or Hire Someone to Vet Opportunitie
An additional significant reason for the rules governing who or what may be considered an accredited investor is the assumption that a sophisticated investor with sufficient wealth can vet opportunities or hire someone with enough expertise and capability to vet the options for you.
The conclusion for investors regarding these matters is that these investments, which often involve startups and emerging enterprises, provide a greater potential for profitable returns. Large publicly traded, already established companies have a hard time experiencing further growth when they already dominate the marketplace. However, small startups can skyrocket in growth, sometimes exponentially, making the risk involved worth it for the potential reward.
But as explained, the accredited investor requirements are in place to help ensure this risk falls on those who can handle it the best.
