An individual deemed to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.
A sophisticated investor is a special status that is given to an investor who has years of experience and knowledge of the trading business and has a high net worth using which he or she is eligible to participate in high-risk investment opportunities. It also allows the investor to invest in big commercial projects and get returns.
A sophisticated investor is different from other investors as they get various benefits and opportunities that are not open to other investors. This type of investor brings in bigger amounts of money for investment purposes and raises capital for large projects.
Due to their large income bracket, a sophisticated investor is able to take up higher-risk investments and can sustain losses. This means they do not feel the need to liquidate their investment assets in the short term.
Accredited investors are different from sophisticated investors in the sense that they have to meet certain requirements regarding their income, net worth, asset size, expertise, etc. Once an investor meets either of these requirements or all of these requirements, they are allowed to trade securities that may not be registered with the SEC.
For example, if a company operates under the Rule 506(b) and sells their securities, an unlimited number of accredited investors can take part in it and only a limited number of sophisticated investors can participate. This way sophisticated investors and accredited investors are differentiated, however, they can not be the same.
In order to be categorized as a sophisticated investor, the investor must meet the minimum requirements and certification. This means that the investor has to clearly convey his experience level and competence in the investment market. The investor must actively participate in the study of the financial market and continuously invest in various opportunities that show his success.
The size of the investment should be large enough to convince the SEC that you are capable of taking on high-risk investment opportunities. While the SEC has not rolled out a fixed figure of income, net worth, and asset requirement, it has clarified the minimum requirements to be considered as an accredited investor.
According to the SEC, a sophisticated investor is one who:
A sophisticated investor typically has years of experience in dealing with market trading and the financial market. The investor should also keep themselves updated with all the changes taking place in the market, especially regarding the investment sector. They should know when to invest and the best time to opt out to mitigate risks and losses. Furthermore, a sophisticated investor will have sufficient funds to back him up in case of any losses.