Recently I was asked to explain the difference between accredited and sophisticated investors. A little background should help:
The SEC definition of an accredited investor includes an individual or married couple with a net worth of at least $1 million OR annual income exceeding $300,000 ($200,000 if unmarried) in the two most recent years. The definition also includes certain businesses, trusts, and charitable organizations. The full definition details are explained on the SEC’s website.
The SEC also allows participation in oil and gas investments by “Sophisticated Investors”. These are individuals who do not necessarily meet the accredited investor standards but have a sufficient knowledge and experience in financial and business matters to evaluate the risks and merits of an investment. This definition includes individuals with prior experience investing in prior placement oil and gas drilling projects or investors who represent that the contemplated investment will not exceed 20 percent of their net worth at the time of purchase. Additional details are available on the Absolute IPO website.
These standards are intended to help protect potential investors from experiencing unsustainable loss of income or net worth when making a decision to invest in private placement oil and gas partnerships. And this just makes good sense. There’s risk associated with any investment and the prudent investor will have the knowledge and money to sustain the risk regardless of the project’s degree of success or failure.
Your comments or questions are welcomed.