Most of the private industry investment in the United States is restricted to two types of investors: accredited investors and eligible purchasers. This limitation is intended to protect businesses. Since the private industry is less open and liquid than public marketplaces, individuals and institutions seeking to purchase must demonstrate that they have the financial means or expertise to run the initiative.
Private businesses in the United States have grown tremendously over the last several decades, expected to reach a worth of $18 trillion in February 2022. Many Americans, on the other hand, are unable to participate in private industry commodities due to a lack of accreditation. (To qualify as an eligible buyer, a potential investor verification must have at least $5 million in financial assets.) Only 13% of American households are registered as accredited investors as of 2022.
Why Is the Need for Accreditation?
The certification criterion ensures that investors have the financial knowledge to assess the threats and advantages of an investment, as well as sufficient money to withstand the financial implications of a loss.
In the United States, participating in a public corporation is a simple and uncomplicated process. Users find a company, purchase shares via a brokerage account, and resell them into the market when the time is right. Almost anyone can purchase stock in a public firm. Public corporations must go through a minimum requirements process and give detailed public reports in return for this broad access to investors. These declarations can help investors make better decisions. To put it another way, government markets are open and liquid.
As a result, the SEC only allows authorized investors to invest in some investments. Private equity firms, hedge funds, and venture equity funds are examples of private enterprises and private assets.
Evolution of Accredited Investor Rule Changes?
The certification standards were created by the SEC in reaction to the Great Depression. The guidelines were last updated in 1982 when private money was still a relatively new sort of asset and made up a significantly lower percentage of the US market than they do now. An automated investor verification system can assist financial firms to identify and ensure that the potential investor meets all the requirements needed to be an accredited investor.
Moreover, for decades, the Securities and Exchange Commission (SEC) utilized only two factors to decide whether someone was an accredited investor: income or personal wealth. Despite hyperinflation, those financial limits have stayed unchanged since 1982. Little has evolved until recently that a clause in the 2010 Dodd-Frank Act exempts a user’s main residency from their total value.
How to Become an Accredited Investor?
Accreditation is dependent on a person’s wealth, economic qualifications, or financial knowledge as shown by certain credentials or certificates. Individuals must fulfill one of the following conditions to be accredited:
- Not including their home residence, they have a total value of over $1 million (a person or jointly with a spouse or a partner)
- For the preceding two years, they have earned at least $200,000 (independently) or $300,000 (collectively with their husband or spousal similar).
- Equities representative licensees (Series 7), investment adviser personal licensees (Series 65), and private commodities offerings representative licensees in good standing (Series 82)
- “Knowledgeable staff” of the fund are responsible for purchases in private funds.
While the SEC left the door open to broadening the requirements in 2020 by allowing people to qualify based on relevant certifications, classifications, or qualifications, such an advancement looks doubtful under the current administration, which has conveyed little interest in expanding access to the private exchanges to more investors.
Changes to the criterion, on the other hand, are almost certainly on the way. The Securities and Exchange Commission (SEC) said in 2021 that it may revisit the financial limits for individual investors. Will adjust for inflation, many predict the Commission to increase the net worth standards set in 1982. As a result, the percentage of certified investors would be reduced.
Why do Businesses Need Investor Verification Solutions?
Know your investor is a robust technique to verify investors who fancy getting in a financial relationship with an organization or a firm. The need to verify investor background can be handled by fully automated know your investor services that run a thorough background check to verify potential investors or an investment firm, and to check if their names pop up in the blacklist databases or PEP (politically exposed persons) lists. A robust investor verification software will assure businesses that the person they are getting involved with, has the efficiency and expertise that their firm demands. Moreover, to make sure that they have commodities for long-term investment ventures. And being an accredited investor will open a user to more diverse investment opportunities, allowing them to be a part of unique and limited projects.