When an item, or a destination, is made available to only a certain group of people, it seems very exclusive, so everyone wants the item – or to visit that particular location. Back in the 1970s, when disco was the rage, there was a wild, and wildly popular, nightclub in New York City. Its patrons were famous actors, actresses, singers, musicians and artists. Unless you “were someone” or “knew someone,” you didn’t get in the door. I’m sure there are still places like that today, but none rival the notoriety this particular club attained. Still, when morning came, and the cleaning crew turned on the lights, wasn’t this “just another nightclub?” In this instance, the “restrictive entry policy” of this club serves as a good analogy for stocks/securities that are only offered to certain individuals, namely, “accredited investors.” I had someone ask me if those investments are any “better” than the ones offered to the general public. You might be surprised by the answer.
First, we’ll start by defining an accredited investor. According to investor.gov, “[an] accredited investor, in the context of a natural person, includes anyone who:
• earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
• has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).”
When a company makes an investment available to the general public, there are duties and responsibilities that the company has to the investors, and certain prescribed disclosures must be provided. The investment needs to be “suitable” and appropriate for each customer. When someone is an accredited investor, however, the rules and requirements are lessened for the company offering the investment opportunity. Why? Because it is believed that accredited investors are able to bear the risk that accompanies investment in these securities. Accredited investors are aware, or should be aware, that these particular offerings contain unique risks, and their entire investment could be lost.
So, when you hear that an investment is only available to accredited investors, now you know that the offering really isn’t “special” in any way, just because it is reserved for certain people. It’s not necessarily of any higher value, nor is it any better than any other investment. (It’s probably serving the same drinks and spinning the same disco tunes as the club down the street!) The difference is that the company offering the security simply doesn’t have to follow rules and regulations that are as strict, when making it available to accredited investors.