Accredited Investor Canada: Rules for Individuals
In Canada, an accredited investor is someone who meets certain financial thresholds and is eligible to invest in certain types of private investments that are not available to the public. The rules for qualifying as an accredited investor are established by securities regulators and are designed to ensure that investors have the financial means and knowledge to invest in these types of investments.
To qualify as an accredited investor in Canada as an individual, there are three main criteria that must be met:
Net Income
The first criteria are based on net income. An individual must have earned income of at least $200,000 in each of the last two years, or combined income with their spouse of at least $300,000 in each of the last two years and have a reasonable expectation of reaching the same income level in the current year.
Net Assets
The second criteria are based on net assets. An individual must have financial assets, before taxes but net of liabilities, of at least $1 million. This excludes the individual’s primary residence and any debt associated with that residence.
Knowledge and Experience
The third criteria are based on knowledge and experience. An individual must have the knowledge and experience to understand the risks of investing in private markets. This can be demonstrated by obtaining certain professional designations or having relevant work experience in the financial industry.
It’s important to note that individuals who meet these criteria may not necessarily be suitable for all types of investments, and that private investments can be risky and illiquid. As such, investors should always do their own due diligence and seek professional advice before making any investments.
In addition to these criteria, there are certain exemptions that allow individuals to qualify as accredited investors in Canada, such as if they are a registered advisor or dealer, or if they are investing through a self-directed registered account.
Why Canada has Accredited Investor Rules
The accredited investor rules in Canada are designed to regulate the sale of certain types of securities that are not available to the public. These rules aim to protect investors from the risks associated with investing in these types of securities by ensuring that they have the financial means and knowledge to do so.
Who Benefits from the Accredited Investor Rules?
The rules benefit investors who are deemed to have the financial resources and knowledge to invest in these types of securities. Accredited investors have access to a wider range of investment opportunities, including private placements, venture capital funds, and hedge funds. This can provide them with potentially higher returns than traditional investment options, such as stocks and bonds.
Who is Hurt by the Accredited Investor Rules?
On the other hand, the rules may hurt investors who do not meet the financial or knowledge requirements to qualify as accredited investors. These investors may be excluded from certain investment opportunities and may miss out on potentially high returns. In addition, private investments can be riskier and less liquid than traditional investments, which can expose investors to greater losses.
Criticism of Accredited Investor Rules
The rules may also be criticized for perpetuating wealth inequality by giving access to investment opportunities primarily to those who are already wealthy. This may limit opportunities for smaller investors to build their wealth through alternative investment options.
Are Accredited Investors Better Off?
While some private investments may offer potentially higher returns than traditional investment options, they also come with higher risks and can be illiquid.
There is no conclusive evidence that private investments available only to accredited investors consistently outperform traditional investment options. However, some studies have shown that certain private investments, such as venture capital and private equity funds, have historically generated higher returns than traditional investments, such as stocks and bonds, over the long term.
Survivorship Bias
Survivorship bias is a common issue in the analysis of investment returns that can impact the rates of returns cited by those promoting private investments. Survivorship bias occurs when only the successful investments are included in the analysis, while the unsuccessful ones are excluded. This can lead to an overestimation of the rates of return and an underestimation of the risks associated with these investments.
In the context of private investments, survivorship bias can occur because many private investments fail, and the investments that do succeed tend to be the ones that are highlighted by investment managers and promoters. This can create a skewed perception of the potential returns of private investments.
Conclusion
Becoming an accredited investor in Canada as an individual requires meeting certain financial thresholds and having the knowledge and experience to understand the risks involved. While the rules for qualifying as an accredited investor aim to balance the need to protect investors with the desire to provide greater access to investment opportunities, they may exclude some investors and perpetuate wealth inequality. It’s important for investors to carefully consider their options and seek professional advice before investing in private markets. Ultimately, the accredited investor rules in Canada serve to ensure that investors have the financial means and knowledge to invest in certain types of securities, while also protecting them from potential risks associated with these investments.