What Does It Mean To Be An Accredited Investor In Singapore?
The Securities and Futures Act (SFA) in Singapore distinguishes retail investors from higher net-worth investors (i.e. Accredited Investors).
Typically, Accredited Investors can gain access to more sophisticated investments that are not available to retail investors. This can also be read as investments that are more complicated to understand, and Accredited Investors have better abilities to decipher if such investments are suitable for them.
Since early 2019, financial institutions can no longer deduce whether a client qualifies to be an Accredited Investor. Instead, they need to obtain an explicit opt-in from clients who qualify to be an Accredited Investor.
What Does It Mean To Be An Accredited Investor?
First, let’s just make clear that there are two types of non-retail investors: 1) Accredited Investors and 2) Institutional Investors.
We focus on who the MAS defines as an Accredited Investor:
i) Individuals with a personal net asset in excess of $2 million;
ii) Individuals with financial assets, such as deposits or investments, that exceed $1 million.
ii) Individuals with an income of not less than $300,000 in the past 12 months;
iii) Corporations with net assets exceeding $10 million in value, in their most recent balance sheet;
iv) Trustees of trusts that the MAS approves; or
v) Persons that the MAS approves
To understand who the MAS classifies an institutional investor, you can scroll to the bottom of the article, where we’ve listed the relevant entities.
In general, we can see that individuals who qualify to be Accredited Investors are considered rich. They have a higher net worth and/or higher earning capacity.
Regardless of how these individuals may have accumulated their wealth, which could be a combination of property price appreciation, running a business, or even winning the lottery, they can be considered an Accredited Investor as long as they qualify.
This is also worrisome as they may be individuals may have a higher net worth without necessarily being more financially savvy or better equipped to manage their own investment risks than ordinary retail investors. This is why the regulations protect Accredited Investors – requiring financial institutions to obtain an explicit opt-in – and will understand that they are investing in more complicated financial products no available to the public.
An example is that investments sold to the public, such as shares, bonds or investment funds, require a prospectus to be registered with the MAS. Intermediaries dealing with customers must also be licensed by MAS. These can be bypassed when investment products are sold to Accredited Investors.
How MAS Has Tweaked This Classification Over Time
To tighten the process of being classified as an Accredited Investor, the MAS introduced two main measures. 1) an individual’s primary residence can only contribute up to $1 million of the required $2 million in personal net assets; and 2) individuals must opt-in for consideration as an Accredited Investor.
In the past, the full sum of $2 million could have come solely from an individual’s home value. Needless to say, this was a more “dangerous” way to classify someone who owns a property worth $2 million as financially savvier than the man on the street and able to manage and take on more risks.
In addition, such a person may be treated as an Accredited Investor even without his or her knowledge in the past. They may have been introduced to complex and risky financial products without they knowledge that they were being treated differently from a retail investor.
Also, certain statutory boards, such as town councils, educational bodies or religious bodies, will no longer be automatically classified as Accredited Investors. They now have to opt-in as well. This makes sense too as these entities aren’t supposed to have professional investment acumen in the first place.
Why You May Not Want To Opt-In As An Accredited Investor Even If You Qualify
#1 You May Not Be Financially Savvy To Manage Risk On Your Own
If you or your parents are not investment experts, but fall within the classification of an Accredited Investor, you may want to think twice before doing opting in. This is because you’re not afforded the same regulatory protection as those considered as man-on-the-street investors, and you may be sold complex investments that may not meet your investment objectives.
Just because you gain access to more investment options does not mean you will be better off. If you don’t truly understand what you’re investing in, you may be putting yourself at greater risk of suffering financial losses.
Even if you think you understand what you’re investing in, you may not fully comprehend how the investment is structured or the amount of risk you’re taking on just to earn a slightly higher return.
#2 You Are A Risk Averse Investor
If you generally don’t want to take higher risks with your money, you should definitely not opt-in to receive an Accredited Investor tag.
A major benefit of becoming an Accredited Investor is gaining exposure to riskier and more complex investment products that not readily available to the public. An investment that offers low risk will almost always go through the tedious process of making itself available to the masses.
#3 You Will Become A Main Target For Certain Investments
Since you’re an Accredited Investor, you will become a “target” for riskier investments that cannot be sold to the public. This means your bank relationship manager or financial advisor can recommend you products that are not marketed to the general public.
Taking On Higher Risk Does Not Always Mean Receiving Higher Returns
While lower-risk investments will almost always offer lower returns, you should understand there is no guarantee that a higher-risk investment will give you higher returns. Instead, it also means that there is a higher risk or losses, especially in the shorter-term, or even failure.
If you’re not sure about an investment, the smartest thing to do is avoid it whenever you’re in doubt.
Who Qualified As An Institutional Investor?
According to MAS, an Institutional Investor is a:
i) Licensed banks, under Singapore’s Banking Act
ii) Merchant banks, under Singapore’s Monetary Authority of Singapore Act
iii) Finance companies, licensed under the Finance Companies Act
iv) Companies or Co-operatives licensed under the Insurance Act
v) Companies licensed under the Trust Companies Act
vi) Singapore government
vii) Statutory bodies in Singapore under any Act
viii) Pension funds or Collective invest schemes
ix) Holders of capital markets services licenses dealing in securities, fund management, custodial services for securities, real estate investment trust (REITs) management, securities financing or trading in futures contracts
x) Persons who carries on the business of dealing in bonds with accredited investors or expert investors
xi) certain Trustees approved by the MAS
xii) certain Persons approved by the MAS
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