In the Guide to investing from Wells Fargo Advisors (2012/2013), it is indicated that hedge funds are only available to “accredited investors” or “qualified purchasers” within the meaning of the Guide to investing in hedge funds, as per U.S. securities laws.
According to the SEC’s Office of Investor Education and Advocacy on its Investor Bulletin (n.d.), an accredited investor means having a minimum level of income or assets. Pension funds, insurance companies, and wealthy individuals are known as institutional investors.
The Office Report to Congressional Committees (United States Government Accountability -GAO, 2013) say that according to Rule 501 (a) promulgated under the U.S. Securities Act of 1933, SEC requires an investor to have an annual income over $200,000 ($300,000 for a married couple) or a net worth over $1 million, excluding a primary residence, to qualify as accredited. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act commands GAO to study the criteria for qualifying individual investors as accredited.
They indicate that qualifying accredited investors can be institutions or individuals.
Institutionally accredited investors are venture capital funds that invest in start-ups at later stages of development, whereas individual accredited investors (angel investors) invest in early-stage start-up companies or hedge funds with high growth potential.
This report examines a market participant’s view on the existing criteria for accredited investor status and alternative criteria.
The goals of the accredited investor standard are to streamline capital formation for small businesses and to protect investors. Nevertheless, the standards for qualifying as an individual accredited investor has remained unchanged since the 1980s, excluding an investor’s primary residence in the calculation of net worth in the year 2010. Thus, as the numbers of individuals able to qualify as accredited has increased over the years, some policymakers and market participants have raised concerns about diminished investor protection.
The most relevant criterion for balancing investor protection and capital formation; the market participants defended, was the net worth, and also adding an investment requirement, such as the ability to take risk, and the use of an investment adviser as an alternative criterion.
They say that the definition of an accredited investor must be reviewed every 4 years, beginning in 2014.
SEC’s Office of Investor Education and Advocacy, (n.d.), ‘Investor Bulletin Hedge Funds’, SEC Pub. No. 139 (2/13);
United States Government Accountability –GAO, 2013, ‘Office Report to Congressional Committees- Securities and exchange commission: Alternative criteria for qualifying as an Accredited Investor should be considered’
Wells Fargo Advisors, 2012/2013, ‘A guide to investing in hedge funds’, Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company;