Page 156 - Initial Public Offering - An Introduction to IPO on Wall Street

A high-net-worth investor, a sophisticated investor has a range of expertise and business
awareness that makes them suitable for certain privileges and opportunities. Although the term
is often loosely used to define an investor who has shown certain levels of industry experience,
knowledge, and achievement, there are strict legal criteria that specify what a sophisticated
investor represents, and these definitions differ from country to country.

Due to their greater wealth and net worth, sophisticated investors qualify for some investment
opportunities that are not available to other categories of investors; these include pre-IPO
securities, and in some situations, hedge funds.

In general, sophisticated investors are seen as those who do not need to liquidate financial
assets in the short term and can sustain an investment loss without much impact on their overall
net worth.

However, advising a cautious approach, market analysts say that an investor who qualifies for
sophisticated accreditation is not immune to bad investment decisions or being deceived by
shady deals, frequently referencing the high-worth investors who lost significant sums in the
credit collapse of the 2008 subprime mortgage.

The Securities and Exchange Commission (SEC) in the United States establishes rules under
which in Regulation D a company can make private offers available. These rules include
categorizations for accredited and sophisticated investors.

For instance, Rule 506(b) of Regulation D restricts private offers to an infinite amount of
accredited investors and a limited number of non-accredited, sophisticated investors. This
information is important to keep in mind when choosing investors to offer shares to.

8.3.5 Institutional Investor
A corporation or entity that invests money on behalf of other entities is an institutional investor.
Examples are insurance companies, pensions, and mutual funds. Institutional investors
frequently buy and sell large blocks of securities, bonds, or other assets and are therefore known
as Wall Street whales. The category of investors is often seen as savvier than the typical retail
investor and is subject to less stringent regulations in some cases.

Types of Intuitional Investors

For its clients, consumers, representatives, or shareholders, institutional investor purchases,
sells and controls bonds, stocks, and other investment securities. In general, there are six types
of institutional investors that include the following:

 Insurance companies
 Endowment funds
 Pension funds
 Commercial banks
 Hedge funds
 Mutual funds

Institutional investors are subject to reduced rates and preferential treatment. They are
subjected to less stringent regulatory requirements because they are more competent traders
than individuals and therefore better able to protect themselves.

Characteristics of Institutional Investors

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