An accredited investor is an individual or business entity that is assumed to have the expertise and financial security to engage with securities that are unregistered with the financial authorities. The criteria was set to ensure that those participating in higher-risk securities trading can understand and weather the outcome of the deal, should it not provide the returns that were hoped for. In a Regulation D, Rule 506(c) multifamily real estate syndication investment, the offering is unregistered with the SEC, therefore, all participants must be accredited investors. This also allows the sponsor to advertise the investment opportunity.
Who are Accredited Investors?
The SEC sets out several criteria that must be met to achieve accredited investor status. The primary qualification is earning $200,000 per year ($300,000 with a spouse) in each of the last two years. There must also be the expectation that the same will continue in the present year. Alternatively, the person or couple must have a net worth of over $1 million, excluding the value of the primary residence. Entities may also qualify as accredited investors, generally with greater than $5 million in assets among other requirements.
As of August 2020, the SEC expanded the definitions to allow spousal equivalents to be included when calculating income, assets, and debt, such as a live-in significant other. They also updated the rules to include “knowledgeable employees” of private funds in addition to financial professionals who hold Series 7, Series 65, and Series 82 financial security licenses.
Are you an Accredited Investor?
As there is no centralized accreditation tracking agency. It is the responsibility of the seller of unregistered securities to verify their clients are accredited investors before proceeding. If you (and your spouse or equivalent) qualify based on income criteria, tax forms or income verification paperwork may be requested to certify your status. Typically, the sponsor will ask this from either your CPA, attorney, or using a service like verifyinvestor.com.
When calculating based on net worth rules, be sure not to include the value of your primary residence. Net worth can be calculated by taking the total value of assets, less the value of all debt. The value of retirement accounts can be included as assets. Nerd Wallet has an easy-to-use Net Worth Calculator that may help streamline your math. When verifying your status based on net worth qualifications, there may be a simple questionnaire. Alternatively, they may use financial statements, balance sheets, letters from CPAs, and other forms.
All regulatory authorities of markets and securities are tasked with promoting investment and safeguarding investors. The Securities Act of 1933 is known as the “truth in securities” law. This legislation created both accredited investors and tightened safeguards surrounding communications regarding investments. Non-accredited “sophisticated” investors may still invest in multi-family syndications through a 506(b) offering. Of course, they can also invest in any publicly traded stock, bond, mutual fund, or real estate investment trust (REIT).
Once accredited investor status is achieved, the investor is considered savvy enough to understand all of the factors at play in an investment opportunity. Therefore, they have more freedom to participate in investments unlisted with the SEC or financial authorities.
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