An Accredited Investor ("AI") is an individual or firm who meets the minimum financial threshold set by regulators in a country and is given access to exclusive investment opportunities with fewer regulatory constraints.
These investment opportunities are, at times, deemed to carry a greater risk because they do not require the normal disclosures that involve registration with regulatory bodies. Examples of these investments would include securities-based derivatives contracts and units of collective investment schemes.
An AI must meet at least one of the following requirements from the relevant authorities regarding their income, net worth, asset size, governance status or professional experience. Fundamentally, regulatory authorities wish to ensure that AIs are financially stable, experienced, and knowledgeable about relatively risky ventures and, therefore, need less protection from the regulatory disclosure filings. AIs typically include high-net-worth individuals (“HNWI”), banks, insurance companies, brokers and trusts.
AIs have privileged access to venture capital, hedge funds, and so-called “angel investors”, with many deals involving complex and higher-risk investments and instruments.
Which types of investments do AIs typically get access to?
Generally, AIs are more likely to be offered investments with the possibility of greater returns than non-accredited or retail investors.
They are, therefore, able to invest money directly in some of the following instruments and managers:
- Private equity: this refers to money raised from institutions and wealthy individuals, which is invested in buying and selling assets or businesses. After raising a specified amount, it will stop accepting new investors and the fund will close to new investors. Within a preset time frame, usually no more than 10 years, each fund is liquidated, selling all its assets and businesses;
- Private placements: a private placement is a sale of shares or bonds to pre-selected investors and institutions instead of the open market. It serves as an alternative to an initial public offering for a company seeking to raise capital for expanding firms looking to generate funds for future growth;
- Hedge funds: these are limited partnerships that uses pooled funds and employ different investment mandates to earn active returns for their investors;
- Venture capital: this is a form of private equity where investors provide capital to start-ups with the potential to generate high returns in the long run. The companies and small businesses that venture capitalists invest in are believed to possess long-term growth potential. Such capital generally comes from HNWI investors, investment banks, as well as other financial institutions;
- Equity crowdfunding: this refers to the type of investment where a “"crowd” (of people) invest in an early-stage unlisted company, in exchange for shares in that company; investors of these companies are usually HNWI individuals, venture capitalists, and “business angels” (i.e. those who help new or ailing businesses).
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Prerequisites of an Accredited Investor?
The rules and regulations governing qualification as an AI vary from one jurisdiction to another, and they are usually defined by local market regulators. Even so, no government agency or independent body reviews an investor's credentials, and there is no existing certification examination or a piece of paper that states that a person has become an AI.
However, following the global financial crisis in 2008, the Monetary Authority of Singapore (“MAS”) took measures to strengthen the Securities and Futures Act (“SFA”). This was in part to create a regulatory framework for AIs, and partly in response to a number of bond defaults in the city-state in 2016.
These measures included the enhancement of regulatory safeguards for retail investors. The key intent being to clearly distinguish between retail investors as well as non-retail investors like AIs and institutional investors.
The MAS further differentiates AIs from the institutional investors — where the latter may include licensed banks, merchant banks, finance companies, the Singapore government, statutory bodies, r pension funds, or collective investment schemes.
According to the MAS, AIs are:
- Individuals with personal net assets in excess of SGD2 million;
- Individuals with net financial assets in excess of SGD1 million;
- Individuals with an income of not less than SGD300,000 over the preceding 12 months;
- Corporations with net assets exceeding SGD10 million on their most recent balance sheet;
- Trustees of trusts approved by the MAS;
- Other persons approved by the MAS.
In essence, the primary qualification to be an AI is wealth, although the source of such wealth is not a factor. Since these requirements imply that AIs are more financially capable and knowledgeable, such investors do not benefit from the same regulatory safeguards as retail investors.
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Recent changes to the status as an AI in Singapore
The MAS has recently introduced a number of key measures to redefine and regulate the criteria relating to a person to be considered an AI.
The definition has been amended to tighten eligibility criteria and allow a wider class of persons to be classified as AIs. This is pursuant to the SFA and the Securities and Futures (Classes of Investors) Regulations 2018 ("SF(CI)R 2018").
With effect from 8 January 2019, upon the implementation of the relevant regulations of the Securities and Futures (Classes of Investors) Regulations 2018:
- an individual’s primary main residence can only contribute to make up a maximum of SGD1 million - half of the required SGD2 million in personal net assets required. In the past, the full entire sum of SGD2 million could have been solely from an individual’s home value. However, this was considered as an inappropriate way to assess if someone was an AI or not, as these people may possess wealth, but not the suitable investment experience;
- individuals must “opt-in” as an AI. In the past, a person could have simply been treated as an AI without his or her knowledge, and offered complex and risky financial products;
- an “opt-out” process for the existing clients of financial institutions ("FIs") to opt-out as an AI;
- certain statutory boards, such as local councils, educational bodies or religious bodies, will no longer be automatically classified as AIs. They now have to opt-in.
Being an AI in Singapore
The update to regulations regarding AIs gives eligible investors the choice of whether to consent to being treated as an AI or not.
Eligible investors may choose to become an AI to unlock a larger pool of investment products opportunities available to them, at the expense of lower levels of regulatory protection.
It is ultimately the investor's choice whether having easier access to a larger pool of investment products is worth the increased investment risk.
Indonesia does not distinguish between AIs and other investor types. This means that all investors are equally protected and do not gain more or less risk, due to the lack of an accredited investor status.
Why some investors decide not to be considered as an AI
One of the key benefits of being an AI is having the opportunity to invest in riskier investments that are usually unavailable to the public. Low-risk investments will almost certainly have to go through the regulatory processes necessary to be made available to the general population who may not be AIs. However, some investors may have a much lower risk appetite for what is made available through these instruments.
Inexperienced with higher-risk investments
As AIs are not afforded the same regulatory protection as retail investors, they may be offered investments which are complex in nature. It may be difficult to fully comprehend how the investment is structured or appreciate the amount of risk to assume to earn the returns stated.
Frequently asked questions
What are the new rules about opting-in as an AI?
After 8 April 2020, all investors with new accounts are required to sign an opt-in confirmation before they will be treated as an AI.
From 8 July 2020, investors will be required to opt in with their financial service providers as an AI.
What supporting documents are needed to submit for an AI eligibility assessment?
Examples of supporting documents
For net personal assets / net financial assets:
- Latest bank statement;
- Latest statement from the Central Depository (Pte) Ltd (CDP) showing personal assets;
- Latest statement from brokerage houses showing net personal assets;
For net equity of property:
- Title deeds free of encumbrances;
- Latest housing loan statement
- Salary slip;
- Latest Notice of Assessment or overseas tax authorities’ returns;
- Letter from employer certifying individual’s income in the preceding 12 months
Can different AI statuses be selected for different accounts?
An AI status is applied independently and consistently within a particular financial institution. If an investor opts in for an AI status, this will be applied to all accounts held in their name with their financial services provider. The AI status cannot be individually modified on a transactional basis.
Can existing investments where an AI status is held be subject to the regulatory safeguards accorded to a non-AI after an investor successfully opts out of being an AI?
No, they will not benefit from regulatory safeguards accorded to a non-AI. Only investments where an opt-out choice has been processed will be subject to the regulatory safeguards accorded to a non-AI.
Can an investor change his mind and withdraw consent to be treated as an AI after an opt-in form has been signed?
Yes, there is a right to withdraw consent at any point in time.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.