Page 155 - Initial Public Offering - An Introduction to IPO on Wall Street

since they want to generate as much capital as possible. SEC has however laid down laws to
ensure that corporations do not manipulate the valuations of IPOs.

8.3.3 Accredited Investor
An accredited investor is a person or corporate entity that is authorized to trade securities that
are not required to be registered with the financial authorities. By meeting at least one criterion
regarding their professional experience, income, governance status, asset size, or net worth,
they can become eligible for this privileged access to stock.

In the U.S., under Regulation D, an accredited investor is a term used by the Securities and
Exchange Commission (SEC) to refer to financially literate investors with a limited need for
the protection afforded by regulatory disclosure reporting. Accredited shareholders include
trusts, high net worth individuals (HNWI), brokers, insurance firms, and banks.

An individual accredited investor, as per the SEC, is someone who either:

 Has an income in each of the previous two years exceeding $200,000 (or $300,000 with a
partner) and expects to earn the same during the current year, or
 Has a net worth of more than $1 million, either independently or with a partner (not
including the value of a primary residence)

Organizations that may qualify as accredited investors include banks, trusts, investment
brokers, insurance companies, etc. having assets worth more than $5 million.

Accredited investors are legally allowed to buy non-registered securities from regulatory
bodies such as the SEC. Many businesses prefer to sell securities directly to this category of
accredited investors. Since this decision allows businesses to be exempted from registering
stock with the SEC, they can save a lot of money.

This type of sale of shares is called a private placement. It can put these accredited investors at
a great deal of risk. Therefore, the authorities need to make sure that their risky initiatives are
financially secure, competent, and informed.

When businesses decide to sell their stock to accredited investors, the function of regulatory
authorities is confined to checking or providing the appropriate benchmarking criteria for
deciding who qualifies as an accredited investor.

Regulatory bodies help decide if the applicant has the financial ability and expertise required
to take on the risk of investing in unregistered securities. Accredited investors have preferential
access to angel investments, hedge funds, venture capital, and transactions involving diverse
and higher-risk investments and tools.

8.3.4 Sophisticated Investor
A method employed by the Securities and Exchange Commission (SEC) in the U.S to protect
investors is regulating who can make investments into financial offerings that are especially
high-risk, poorly controlled, or complex.

While everyone with enough money can invest in securities, the SEC limits entry to what it
calls the' sophisticated investor' in undertakings that are more strongly regulated, ambiguous,
or volatile. A sophisticated investor is an investor who has enough money, expertise, and net
worth to participate in more sophisticated types of investment opportunities.

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