With an understanding of the private capital markets and the type of transactions available, the next thing to consider is whether you qualify to invest in private securities. As noted in the previous articles, given the lower liquidity in private securities and the reduced level of information disclosure, the SEC has implemented requirements of investors.
These rules are in place to protect investors and to distinguish those who are considered financially sophisticated — in that they understand the risk profile of these investments — and are also better able to sustain potential losses.
For the most part, an investor must fit one of three categories in order to invest in the $1.2 trillion annual private placement market: Qualified Institutional Buyer (QIB), Qualified Purchaser (QP) or Accredited Investor.
A QIB is an institutional investor that has in excess of $100 million in investable assets. A QP can be an institution or individual with in excess of $5 million in investable assets or one who oversees $25 million in investable assets of other QPs. An Accredited Investor can be an individual that has earned at least $200,000 per year for the past two years and expects to make in excess of $200,000 this year, or has in excess of a $1 million net worth, excluding the value of one’s primary home.
As you might expect, the majority of the private placement market is dominated by institutional investors; however, there are up to 10 million accredited investors in the U.S.
With the passing of the JOBS Act, the SEC is now determining how to open up investment opportunities to non-accredited investors through crowdfunding, but there will be limitations on the size of the investment an investor can make based upon their annual income and net worth. At present, the expectation is that a crowdfunding transaction would be available for companies raising less than $1 million in a year.
These transactions would be available to non-accredited individuals, but their investment size would be limited based on salary and net worth. For individuals making less than $100,000 per year, their maximum investment would be the greater of $2,500 or 5% of their annual salary or net worth. For individuals making in excess of $100,00 per year, the investment would be limited to the greater of 10% of their annual salary or net worth, subject to a $100,000 maximum.
The bottom line is, be careful as an individual investor in this space. ACE provides a market for marketed new issues of private securities. All investment opportunities sponsored on ACE must be posted by an approved and regulated broker-dealer, helping ensure that detailed due diligence has been conducted on the issuer and investment materials prepared in a fully compliant manner.
— ACE Group manages the online marketplace for new issuances of private securities. ACE connects Qualified Institutional Buyers and other Accredited Investors with private investment opportunities marketed by investment banks and other private placement agents. ACE is a partner of AD:60, parent of MyBankTracker.