Who Is an Accredited Investor?
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 exercises 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 inevitably 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 grounds 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.