An accredited investor is an individual, entity, or financial institution with a special financial status that enables them to invest in certain opportunities that are not legally available to ordinary investors.
While accredited investors usually choose investment opportunities such as hedge funds, accredited investors can also invest in venture capital and angel investments. These are a unique type of investments for businesses that are starting or rapidly growing private companies that need to build their operations.
The role an accredited investor can play in the local economy, shaping businesses and providing capital for those who may not qualify for the traditional route, allows them both a range of risk and reward. They are increasingly popular in South Africa due to the high volume of small businesses and range of investors who can, and are choosing to make an impact on the economy.
The details of an accredited investor
There are no set requirements to qualify as an accredited investor, or as angel investor, in South Africa.
In terms of details, they are usually individuals or smaller businesses that invest across products and portfolios, and typically in businesses that are starting out. There are three main reasons angel investors can assist businesses.
- Angel investors are more flexible and agile and can make a decision with very little red tape
- Many angel investors are or have been entrepreneurs and have years of experience and insight that are incredibly helpful for those starting out
- They are tied to the success of the business more so than traditional, or institutional investors, as their investment is directly impacted by the growth and success of the business.
Why are accredited investors important?
A small business owner or entrepreneur might need to raise some capital in the form of an angel investment or venture capital investment at some point during the course of running a business – which is typically in the high-growth phase. In this case, funding usually comes from an accredited, or angel, investor.
Accredited, or angel, investors typically have a range of interests and portfolios to look after. While they may have a higher level of investment and financial acumen than most, it is important to understand the risk and reward for both the investor and business owner.
Because of this, it may be wise for the small business owner to learn more about this type of investor and these types of investments. While it may increase the chances of obtaining a much needed investment, both parties should undertake due diligence.
Taking on funding from accredited investors puts a business in a very different position, with many more responsibilities in terms of reporting, structure and most critically, being profitable. For those considering becoming an accredited investor, choose wisely and the same can be said for those choosing to raise capital and work with one.
Overall, accredited, or angel, investors, can assist in helping grow the local economy, shape businesses and provide capital to those who may be in need. Their importance is clear for both businesses and stakeholders and should be maximised wherever possible, and suitable, after due diligence and a culture fit is concluded by all parties.