Understanding accreditation in the US and Canada and why it matters for angel investing.
An accredited investor is an individual, entity, or financial institution with a specific financial designation that enables them to invest in opportunities that are not legally available to ordinary investors. Accredited investors can invest in all venture capital and angel investments, which are special types of investments that build or support high-growth enterprises.
In Canada, the official definition of accredited investors remains consistent across all provinces and is taken from section 1.1 of the National Instrument 45–106. The most commonly used qualifiers are:
- An individual, alone or with a spouse, who has net assets of more than $5 million
- An individual who has a before-tax income of over $200,000 for at least two years in a row ($300,000 if combining income with a spouse) and expects to exceed that income in the current calendar year.
In the United States, the Securities and Exchange Commission deems individuals accredited investors when they :
- have a net worth of at least $1,000,000, excluding the value of one’s primary residence
- or have an income of at least $200,000 each year for the last two years (or $300,000 combined income if married) and they expect to make the same amount in the following year
What is the significance of accreditation?
Qualifying as an accredited investor is important for a number of reasons: Accreditation opens up new and stronger opportunities for investment in syndicates and venture funds, as funds require accreditation status to accept investors as Limited Partners (LPs). The majority of strong venture deals require accreditation to ensure the investors involved in that deal are sophisticated enough to fully understand the risks and opportunities associated with the deal; accreditation can open doors, and create important access to deal flow, which is critical to the success of any angel investor.
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