» Institutional Investor Requirements
Last Updated on January 21, 2020 by John Fischer
Institutional accredited investors are organizations that have access to large amounts of money. They use this to invest in a variety of opportunities, including properties and securities. Regulation D provides an in-depth explanation of which organizations can become institutional accredited investors.
While some organizations already take advantage of their accredited investor statuses, others may not even know whether they meet the accredited investor requirements. Whether you plan to buy or sell securities, it’s important to understand how a business can qualify as an institutional accredited investor.
Accreditation Status for Institutional Investors
According to the rules of Regulation D, there are several types of institutions that can meet accredited investor qualification status. Rule 1 explains that all banks, savings and loan institutions, and other banking organizations automatically meet accredited investor requirements. Rule 1 also gives accredited investor status to:
- Insurance companies
- Small Business Investment Companies that have licenses from the Small Business Administration
- All investment companies that have registered themselves under authority of Investment Company Act of 1940
- Government organizations that want to invest money to benefit employees (the benefit plan must have at least $5 million in assets)
- Employee benefit plans with at least $5 million in assets (as long as all investment decisions are made by an accredited investor)
- 501(c)(3) organizations with at least $5 million in assets
- A private business that consists only of individual accredited investors
- Trusts with at least $5 million in assets (the trust cannot be formed specifically to purchase securities from a company)
These options give organizations and the people running those organizations significant flexibility when they want to purchase securities and other types of investments.
Benefits and Limitations of Institutional Accredited Investors
Institutional accredited investors offer similar benefits as individual accredited investors do. Companies selling securities to these institutions do not have to disclose large amounts of information since the SEC expects them to have considerable experience in investment strategies. By setting a financial minimum ($5 million) for an institution to qualify as an accredited investor, the law encourages investments from organizations that have enough money to absorb any losses. The financial minimum also sets an expectation that those running the group’s investment decisions are sophisticated and experienced enough to make those decisions knowledgably.
According to an SEC Investor Bulletin, individuals who are qualified to become accredited investors must have at least $1 million in assets (not including the values of their primary residences) or earn at least $200,000 per year ($300,000 with a spouse). $1 million is a considerable amount of money for an individual to control. CNN Money reports that while the number of millionaires living in the United States has increased over the past several years, they still only account for .33% of the population.
Organizations, however, can accumulate more wealth by combining money from several streams. According to the California Policy Center, the California Teacher’s Association had a net worth of $186 million in 2009. That’s over $181 million more than the organization needs to become an institutional accredited investor.
Establishing a higher financial minimum for institutional accredited investors could actually benefit companies selling securities. Blocking very small businesses from becoming accredited investors helps companies focus on clients that can contribute significantly more money to research and growth. While a business with less than $5 million in assets may have the savvy to invest wisely, businesses with $5 million or more can invest more significantly. Companies selling securities can, therefore, rely on these investors for more capital.
Of course, companies that control over $5 million in assets are also more likely to absorb any losses without going out of business. A company with less than $5 million is more likely to struggle or even go out of business. That would have an adverse effect on the economy, which would defeat the purpose of rules designed to identify accredited investors at both the individual and institutional levels.
Institutional accredited investors play a crucial role in the development and growth of businesses that help the economy thrive. By focusing on accredited investors, companies selling securities can make the best use of increased capital while providing a healthy return to investors. Before any business can take advantage of this benefit, though, they have to make sure the institution is accredited.