If you know the answer to this question, you will have a clearer picture of what you can and cannot do in the Exempt Market.
Let’s start with the majority of people who would generally be considered “average” investors. They usually have varying levels of investing experience and are also known as eligible investors.
To be “eligible,” you either have to meet the net worth or annual income requirements:
– Your net assets have to be greater than $400,000, and/or your annual income for the past 2 years has to be greater than $75,000 before taxes.
– If your income doesn’t quite make it alone, you can combine with your spouse to have a combined annual income greater than $125,000 for the past 2 years.
If you meet one or more of these requirements, then you are an “eligible” investor. Being eligible means you can invest a certain amount in the Exempt Market.
To be considered an “accredited” investor, you still have to meet one or more similar types of requirements as above, but they are considerably higher.
– In this case, your financial assets, not net assets, have to be greater than $1 million. Financial assets are tangible liquid assets and don’t include property.
– If you want to include things like property and rely on your net assets for accredited status, your net assets must exceed $5 million.
– For income requirements, your annual income must be greater than $200,000 for the past 2 years, and if you combine it with your spouse, it must be greater than $300,000 for the past 2 years.
What Does All of This Mean to You in the Private Investing World?
Here is a quick summary:
– If you are not “eligible,” meaning that you don’t meet any of the requirements of an eligible investor, you can still potentially invest in the Exempt Market, but it has to be $10,000 or less in a 12-month period.
– If you are “eligible,” you can invest $10,000 or more in the Exempt Market, not exceeding $100,000 in any 12-month period.
Before you invest in anything, you would meet with a Dealing Representative (DR) and decide if private investing in the Exempt Market is a good fit for you. DRs would consider things like your age, your time horizon, your financial objectives and your risk tolerance to determine if these types of investments are “suitable” for your portfolio. DRs would also consider various things to determine how much to allocate there. There are certainly exceptions, but as a general rule, it is not advisable to exceed 30% of your net financial assets in the Exempt Market. That percentage can also be a lot less depending on your current financial situation and experience in private investing.
– If you are “accredited,” you are not subject to these caps and limitations. The overall assumption is that you achieved accredited status by having a good understanding of how to invest your money, and you can generally invest it however you like.
Just because an investor is accredited doesn’t necessarily mean they should exceed the allocation guidelines that are in place for an eligible investor. There are a lot of discussions to be had before any investment is ever made because there is a lot to take into consideration, such as previous experience in the Exempt Market and a full understanding of the risks involved.
Private investing is still relatively new to “eligible” and “accredited” investors alike, so it’s important to get all the information you need before you decide if it is right for you.
This article was originally posted on https://shannonpineau.com/