Sophisticated Investor Key Takeaways

Reaching transparency with sophisticated investors for fraud exposure and ensured reputation

Who or what is a sophisticated investor?
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:

  • certain investment opportunities (ex. pre-IPO securities and hedge funds);
  • private offerings and other deals that “ordinary” investors never see;
  • wholesale or institutional offers;
  • securities offerings without the common product disclosure conditions that apply to common investors.

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.

How different laws categorize investors with a privileged status
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.

Sumsub provides a bank-grade check of all types of investors from local and international jurisdictions. 

How to verify sophisticated investors and why 
“Do businesses need to take precaution?”

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.

3 steps to investor verification
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.

  • For Net Worth:

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.

  • For Annual Income qualification or wealth:

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 short guide to sophisticated and other investors in different countries

Australia
Company might decide to offer exclusive shares only to those investors who are licenced as sophisticated or professional, but not to experienced ones.

  • Sophisticated investor

Australian Corporations Act states that sophisticated investors have to own:

  1. assets of over $2.5 million;
  2. past two years of gross income over $250,000 per year.
  • Professional investor

To prove a professional investor status, individuals need an AFSL number or proof of assets:

  1. Hold an Australian Financial Services License (AFSL);
  2. Have or control gross assets of more than $10m;
  • Experienced investor

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.

Hong Kong 

  • Sophisticated investor

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.

United Kingdom

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.

USA
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:

  • Sophisticated investor

The SEC describes a sophisticated investor as an individual:

  1. broad business and financial expertise, that enables to produce an educated decision concerning investment, prospective offers, merit and risk evaluation;
  2. no net worth or income thresholds.

SI can be a professor or a securities regulator with financial market awareness but not enough income to claim the accredited status.

  • Accredited investor
  1. income of over $200,000 during the last two years (or $300,000 with a spouse);
  2. net worth over $1 million, alone or the total with a spouse;
  3. individual can be an accredited investor if all equity owners are accredited investors;
  4. individual can be an accredited investor if they are executive officer/general partner who issues securities.

 

  • Qualified purchaser
  1. more than $5 million in investments;
  2. more than $5 million in investments owned by close family members;
  3. a trust, not formed for the investment, with at least $5 million in investments;
  4. an investment manager with at least $25 million under management; or
  5. a company with at least $25 million in investments.

 

  • Qualified institutional buyer (or QIB)
  1. a corporation, nonprofit, or certain other type of entity that owns and invests a minimum of $100 million in securities (e.g. big pension funds and the like);
  2. broker-dealers that own and invest at least $10 million.

 

Canada

  • Accredited investor

In Canada the definition of an accredited investor is referenced to the 1940s Act in the US, where an individual requires to have:

  1. net assets of $1 million with net of related liabilities (alone or with spouse);
  2. gross income of $200 thousand during the last two years (or $300,000 with a spouse) with same amounts expected for the current year.

 

Singapore
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.

  • Accredited Investor
  1. net assets of SGD 2 million, (the value of the residence included). Or other amount prescribed by the authorities.
  2. an income of over SGD 300 thousand in a previous year. Or other amount prescribed by the authorities.

 

  • Expert Investor
  1. involvement (principal or agent) in the capital markets.
  2. trustee participant in a role that authority choose to prescribe.

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.

Stay updated with Sumsub by signing up for our newsletter

Sign up for our Newsletter

Be up and running in minutes.

Questions? Schedule some time to talk with one of our experts.

By clicking the button you agree with our Privacy Policy.

Thank you for subscribing to our newsletters.

Thanks for contacting us!

We will get in touch with you shortly.