If you recently became an accredited investor, you may not be aware of all the strategies that have just been opened to you. An accredited investor is usually a high-net-worth individual or entity, although the U.S. has changed the definition to add another category to it.
The new definition went into effect in late 2020 and added individuals working at private funds or holding Series 7, Series 65 and Series 82 financial securities licenses. The benefit of being an accredited investor is the ability to invest in places non-accredited investors can't.
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Why Are Accredited Investors Able To Invest In More Places?
The history of the accredited investor definition can be traced to the "truth in securities" law or the Securities Act of 1933. The Securities and Exchange Commission wanted to protect investors by requiring more disclosures about investments and tightening rules against fraud and misrepresentation.
However, accredited investors can invest in assets that don't fill those requirements for disclosure. The SEC wanted to ensure that investors facing a great deal of risk by investing in assets that don't meet the disclosure requirements can afford to lose the money they are investing.
Some examples of assets that don't meet disclosure requirements include private equity, hedge funds and venture capital.
Investing In Private Equity And Hedge Funds
Hedge funds and PE funds differ from mutual funds and traditional financial advisors because they are less regulated. Hedge funds use strategies such as short-selling, derivatives and leverage to achieve their returns, hopefully beating their benchmarks in the process.
When you invest in a hedge fund, you get the benefit of an active investment manager who picks stocks on your behalf. You also get the opportunity to short stocks through their fund, which you can't do if you're buying shares outright as a non-accredited investor.
Private equity involves owning shares in a company that's private, which means they aren't required to disclose as much information as publicly traded companies are. PE firms may invest in start-ups, although they are not limited to such early-stage companies. In fact, start-ups are usually limited to venture capital firms, as PE firms often focus more on established companies. However, any private company is fair game for a PE firm.
Venture capital is another way to invest in start-ups, and it's especially risky because you're investing in a company that may not have proven itself yet. However, with great risk comes the possibility of outsized gains as well.
Crowdfunded Real Estate Investments, Specialty Funds And Private Placements
You don't have to be accredited to invest in real estate. However, as an accredited investor, you might choose to hold a partial stake in commercial property through a crowdfunded real estate investment. Some crowdfunding platforms are also open to non-accredited investors, thanks to the JOBs Act, but others are geared toward accredited investors.
Accredited investors can also take stakes in specialty funds that don't meet the disclosure requirements, such as cryptocurrency funds. Non-accredited investors can buy cryptocurrencies directly, but specialty investment vehicles would require more disclosures due to their more complicated nature.
Finally, accredited investors can participate in private placements, which are offerings of securities that aren't registered with the SEC. Non-accredited investors can participate in private placements, but only on a limited basis. Companies are restricted to only 35 non-accredited investors per placement.
"Accredited investors may be overwhelmed by the number of new opportunities available to them once they reach this status. Newly accredited investors need to seriously consider the different risks and returns associated with the new assets that are available to them." said Wittney Rachlin, Chief Marketing Officer of Yieldstreet.
Accredited investors have many more investment options open to them than non-accredited investors. It takes money to make money, but you should never invest funds you can't afford to lose. Accredited investors can afford to lose more money than non-accredited investors, which is why they are allowed to invest in products that don't meet the disclosure requirements necessary for them to be sold to non-accredited investors.