Do Non-Accredited Investors Need to Prove Their Investment Capacity?

When considering non-traditional investments, such as those not made through a bank or stock broker, transparency and due diligence are paramount. One common question that arises is whether non-accredited investors need to prove how much they can invest. This article aims to address this concern, providing insights based on knowledge of Know Your Customer (KYC) procedures and the principles behind investors accreditation.

Understanding Accredited Investors

Accredited investors are individuals who meet certain financial criteria, such as income or net worth requirements, that indicate they have sufficient resources to withstand potential financial losses. The concept is rooted in the idea that these investors have a better understanding of the risks involved or have the means to hire professionals who can assess the risks. Consequently, the safeguards and protections for non-accredited investors are generally weaker for accredited investors.

Know Your Customer (KYC) Procedures

Part of the KYC process, platforms and systems may request personal details such as your Social Insurance Number (SIN) or National Insurance number, your salary, and your financial commitments. More advanced systems use automated processes to streamline the KYC. However, if an investor is flagged, the platform will follow up to confirm that they can commit to the investment amount.

Government Limits on Investments

Government regulations often set limits on the maximum amount a non-accredited investor can invest. The rationale is that if a company fails and goes bankrupt, non-accredited investors can still afford to keep essentials such as food and a roof over their head, limiting the potential financial impact.

Why Prove Investment Capacity?

There are at least two conflicting motivations behind an investment opportunity provider requesting proof of your investment capacity:

True Investment Opportunity: The investment requires significant commitments from multiple investors. Ensuring all investors fulfill their commitments is crucial to the success of the project. Any failure to meet commitments can result in a loss for everyone involved. Potential Fraud: Some unscrupulous providers might be preparing to take your money and disappear, using the proof of capacity to plan how much they can steal.

Steps to Take Before Proving Your Capacity

It's important to proceed with caution but not be overly fearful. Here are a few steps you can take:

Do Your Own Financial Investigation: Conduct thorough research on the person or company asking for your investment. Verify all claims they make. Seek Advice from Others: Talk to friends and trusted contacts for their opinions and insights. This can help you determine if a new company is genuine and not a scam. Keeping the conversation private is crucial to avoid breaching confidentiality agreements. Never Sign on First Meeting: It's advisable not to sign any money-related agreements during the first meeting. Take time to think and consider the offer when the salesperson is not present.

Always be wary of claims and requests for your financial information. By taking these precautions, you can better protect your investment and avoid potential pitfalls in the realm of non-traditional investments.