Well, investors are considered sophisticated if they possess sufficient funds, net worth and financial sector experience to participate in more advanced investment affairs.
If the investor meets the thresholds for sophisticated investors, they are, by a superior position, eligible for broader opportunities and certain benefits, such as:
Looking for a universal definition for a sophisticated investor? Well, it does not exist. It varies depending on a certain standard or legal definition that a country dictates, or a specific circumstance.
Google the term “sophisticated investor” and there will multiple definitions mentioning other types of investors with a very close meaning—accredited, professional, expert, etc.
In countries, Europe or Australia, the investors that fall into the privileged category have a status of “sophisticated”, “qualified” or “professional”, in US and Canada they are “accredited” or “expert” in Singapore. Some jurisdictions describe one type of special investors, other have more than three different ones.
To see the real difference between them without losing the track of thought along the way, we suggest to look at those definitions by country.
A list of some of the examples of most popular jurisdictions across the world that include sophisticated/accredited/professional/expert investor definitions can be found a little further down below.
The answer is: “Yes”. While the amount of access that comes with the status of the sophisticated investor grows, the caution level should rise as well.
To gain access to certain offers, investor’s status has to be proved. And although investors can get certified before working with a particular business, the business can not simply rely upon these claims, made by a third party. Instead, companies must take “reasonable efforts” to verify that their investors are sophisticated or other.
As the definitions of investor statuses vary across the globe, it creates a lot of compliance work for businesses to verify one.
This short check-list is just a rough overview of the process that will depend on the specific jurisdiction and case with what can be more strict or relaxed criteria.
1. Personal Data
Investors submit basic personal data, such as name, address and email;
2. Identity Verification
Investors are presented with series of questions, that confirm their status;For example, they may ask about the individual’s occupation or business (including title), educational background (degrees completed), partners’ capital, net worth, or total sum of all assets, etc.
3. Appropriate Evidence Submission
Depending on the type of investor the person is, they have to submit evidence of their net worth or wealth.
One or more copies of: the brokerage, bank, current asset statements, a letter from the investor’s attorney, CPA, registered investment adviser or registered broker that can state the individual’s qualification.
One or more copies of: tax returns, W2’s, government filings that support income qualification for over 2 years, a letter from the investor’s attorney, CPA, registered investment adviser or registered broker stating that can state the individual’s qualification.
All documents have to be accurate and complete.
A company might decide to offer exclusive shares only to those investors who are licenced as sophisticated or professional, but not to experienced ones.
Australian Corporations Act states that sophisticated investors have to own:
To prove a professional investor status, individuals need an AFSL number or proof of assets:
An individual that holds previous experience in investing in securities that allows them to assess adequacy, merits and risks of the offer, the value of the securities.
According to Hong Kong Cap. 571D Securities and Futures (Professional Investor) Rules, sophisticated investor possesses s high net-worth and one of the following:
1) assets estimating more than HK$8 million;
2) corporations, partnerships, trustee companies with the total of HK$40 million;
3) corporations that are investment holding companies and property of a sophisticated investor.
1) a high net worth and income of more than 100,000 GBP per year;
2) net assets over 250,000 GBP disregarding primary residence, money raised using property, pension policies and insurance.
The difference between the following types of investors is mainly in the financial thresholds. For sophisticated there are none, and for accredited investors they are significantly lower than those for qualified purchasers or buyers.
For this reason, sophisticated investors are considered the easiest to attain, and qualified purchasers are sometimes referred to as “super-accredited” investors.Here, they are listed from the lowest to to the highest status of investors:
The SEC describes a sophisticated investor as an individual:
SI can be a professor or a securities regulator with financial market awareness but not enough income to claim the accredited status.
In Canada the definition of an accredited investor is referenced to the 1940s Act in the US, where an individual requires to have:
The country has two definitions for individual investors. Accredited investors will be able to gain access to securities and securities-based offers without a prospectus, but it will be expected from an expert one.
The verification of all types of investors is most efficiently made through an automated KYC/AML solutions that don’t take as much time as manual checks and provide a fast and engaging verification for sophisticated investors to stay content and onboard.