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The Accredited Investor. Who Is an Accredited Investor
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Most developed countries have laws written to protect the average person from bad and risky investments. The problem is that these very same laws can also prevent the masses from being able to invest in some of the best investments.

In America, we have the Securities Act of 1933, the Securities Exchange Act of 1934, SEC Regulations under these laws and the Securities and Exchange Commission (SEC). These laws and regulations were designed to protect the public from misrepresentations, manipulation, and other fraudulent practices in the buying and selling of securities. They limit certain investments only to accredited and sophisticated investors as well as require detailed disclosure of such investments. The SEC was created to be the watchdog for the laws.

In fulfilling its role as a watchdog over securities, the SEC defined the accredited investor as a person who has earned at least $200, 000 or more as an individual (or $300, 000 as a couple) in each of the last two years and who expects to earn the same amount in the current year. The individual or couple may also qualify with a net worth of at least $1 million.

Rich dad said, “An accredited investor is simply a person who earns significantly more money than the average person. It does not necessarily mean the person is rich or knows anything about investing.”

The problem with this rule is that less than 3% of all Americans qualify under the $200,000 to $300,000 annual income requirement. This means that only this 3% can invest in these stock issues regulated by the SEC. The other 97% are not allowed to invest in the same investments because they are not accredited investors. The SEC's test for sophisticated investors has to do with the investor's level of financial intelligence.

I remember when rich dad was offered an opportunity to invest in a company called Texas Instruments before it went public. Not having the time to look into the company and do his analysis, he turned the opportunity down, a decision he regretted for years. Yet, he did not turn down other opportunities to invest in companies before they went public. He became even wealthier from those investments, investments not available to the general public. Rich dad qualified as an accredited investor.

When I asked to invest in the next pre-public offering of a company, rich dad informed me that I was not rich enough or wise enough to invest with him. I still remember him saying, “Wait until you're rich, and the best investments will come to you first. The rich always get first pick of the best investments. In addition, the rich can buy at very low prices as well as in volume. That is one of the reasons why the rich get richer.”

My rich dad agreed with the SEC. He thought it a smart idea to protect the average investor from the risks of these types of investments although he had made a lot of money investing as an accredited investor himself .

However, rich dad cautioned me, “Even if you are an accredited investor , you still may not get the opportunity to invest in the best investments. To do that requires a completely different type of investor with the right knowledge and access to the information about new investment opportunities. ”

The Investor Controls of the Accredited Investor None

Rich dad believed that an accredited investor, without financial education, had none of the ten investor controls. The accredited investor might have a lot of money but usually didn't know what to do with it.

The Three E's Possessed by the Accredited Investor

Excessive cash—maybe

Rich dad would clarify that although you might qualify as an accredited investor, you still needed the education and experience to progress to the qualified, sophisticated, inside, or ultimate investor . In fact, he knew many accredited investors who didn't actually have any excessive cash. They met the income thresholds but didn't know how to manage their cash very well.

Sharon's Notes

Just about anyone can open a brokerage account to buy and sell stocks of companies that are considered “public companies. ” The stock of a public

company is traded freely as well as bought and sold by the public, usually through an exchange. The stock market is truly a free market in action. Without government or outside intervention, individuals can decide for themselves whether the price of a stock is fair or not. They can decide to buy it and therefore purchase an ownership interest in the company.

In the last decade, mutual funds have become increasingly popular . They are professionally managed portfolios in which each share of the mutual fund represents ownership of partial shares in many different individual securities. Many individuals invest in mutual funds because of the professional management as well as the appeal of owning a small piece of many different securities rather than stock in a single company. If you do not have the time to study investing (so you can make informed investment decisions), choosing a mutual fund or hiring an investment advisor to handle your investments may be wise.

One way to true wealth from securities comes from participating in the initial public offering (IPO) of a company's stock. Typically, the company's

founders and initial investors already own blocks of stock. To attract additional funding the company can offer an IPO . This is when the Securities and Exchange Commission (SEC) steps in—with detailed filing and disclosure requirements—in its attempt to prevent fraud and protect the investor from misrepresentation. This does not mean, however, that the SEC prevents IPOs from being poor deals . An IPO can be legal and still be a poor investment or an outright liability (it goes down in value).

The Securities Act of 1933 and the Securities Exchange Act of 1934 were adopted to regulate this type of investment and to protect the investor from fraudulent or high-risk investments , as well as broker mismanagement. The SEC was formed to oversee the issuance of securities as well as the securities industry.

The regulations for stock issues apply to public issues as well as certain private issues of stock. There are certain exemptions from the regulations that we have not covered. For now, it is important to understand the definition of accredited investor . The accredited investor may invest in certain types of securities that a non-accredited, non-sophisticated investor cannot because the “accredited” status implies that the investor can withstand a higher level of monetary risk than the non-accredited investor.

Robert has discussed the accredited investor requirements of an individual or couple related to income or net worth. Any director, executive officer, or general partner of the issuer of the stock will also be considered an accredited investor even if that person does not meet the income or net worth requirements. This will become a very important distinction when we discuss the “inside investor .” In fact, this is the path often taken by the inside and ultimate investor.

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