Understanding accredited investors

What is an accredited investor?
The Securities Exchange Commission (S.E.C.) established the Securities act of 1933 requiring certain investments only be sold to accredited investors. This act now defines accredited individual investors as those with a net worth of at least $1M or an annual income of at least $200,000 for the past two years with an expectation of making the same during the current year. Click on this article's title for more specifics on the different criteria for determining an accredited investor.

Now, lets understand why the S.E.C. created this act.
During the years before the great depression, there were many scams and promises of getting rich quickly in a big way by investing in different ventures. Many ordinary people bought these investments without really understanding what was involved and ended up losing everything during the depression. In order to mitigate such a large number of people putting all of their key savings into these types of investments, the S.E.C. established the Securities act of 1933 requiring certain investments only be available to investors who could afford to lose risk capital. The thought was that these people would not likely put all of their funds into a single investment, but would have risk capital to invest. These higher wealth investors are also expected to have more understanding of how to evaluate what they are investing in to screen out the scams from legitimate investments. For this reason, most private placements are only available to accredited investors.

What is a private placement or private placement memorandum (PPM)?
An example of a private placement would be a small corporation requiring funds to expand and grow. They may conduct a private placement offering of stock in the company at an agreed price per share to accredited investors. The specifics of the placement are provided in a private placement memorandum (PPM). These accredited investors are able to buy stock usually at a low price while the company receives the infusion of capital to use for expansion, in this case without taking on the burden of debt. The company is happy and the investors are usually happy when, at a future time, the company offers to sell some or all of their shares in an Initial Public Offering (IPO) to the open stock market - hopefully at a much higher price per share. That is why you sometimes hear it is harder to make your first million than your next million. Once you have a million net worth to become an accredited investor, then you have access to investments with potential high return (and high risk) to help quickly reach your next million.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at MarcobeInvestmentsInc@gmail.com with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/. Past articles can easily be found at http://www.MarcobeInvestmentsInc.com/Oil_and_Gas_Investor_TOC.html. This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content