Investment Opportunities for Accredited Investors
Are you an accredited investor who’s ready to invest in more complex securities?
As an accredited investor, you’re able to break away from more mainstream investment options, go beyond the stock market, and invest in more complex asset classes. But what is an accredited investor, what are the investment opportunities for accredited investors, and what do you need to do to qualify to invest in real estate deals?
We’ll cover what it means to be an accredited investor, the criteria you’ll need to clear in order to qualify, and your investment options, including multifamily, private equity, gold, crypto, oil & gas, or promissory notes.
What is an accredited investor?
When you become an accredited investor, you’re seen as able to handle investing in more complex or sophisticated security types as classified by the SEC.
These alternative investments are exempt from registration because the transactions are relatively minor, like smaller companies looking to raise capital. This saves on paperwork, but because they’re more complex, they can also carry more risk. Accredited investors are seen as being able to handle this risk by nature of meeting one or more of the SEC requirements, which we’ll get into shortly.
You know that saying, with greater risk comes greater reward? That’s often the case with complex asset classes. These investments are also more geared toward long-term growth versus quick gains.
What’s the difference between an accredited investor and a sophisticated investor?
While accredited investors need to be financially sophisticated, it doesn’t make them the same as sophisticated investors. Meeting certain wealth and income criteria, or other professional qualifications, makes an investor accredited as long as they can check at least one of the boxes under the Securities and Exchange Commission (SEC) requirements.
Sophisticated investors, on the other hand, are high-net-worth individuals who have a sufficient amount of financial and investment knowledge, enough to evaluate an investment’s pros, cons, and risks.
In the same way that all squares are rectangles, all accredited investors are sophisticated, but all sophisticated investors are not accredited.
If you’re non-accredited, can you invest in unregistered securities?
Sophisticated investors can take part in some unregistered securities, but there are normally limits in place for how many can participate or at what level. We detail this more below when comparing 506(b) and 506(c) offerings.
What qualifies an accredited investor?
Depending on whether you are looking to invest as an individual or an entity, there are different qualifying factors to keep in mind.
Individuals can reach accredited investor status if annual income or net worth qualifications are met
- Annual income: You can qualify in this way if you’ve made over $200,000 as an individual or $300,000 jointly for at least two years before the present year.
Translation: If you made $200 – 300k per year, depending on your situation, in tax years 2021 and 2022 and you’re trying to apply in 2023, you will qualify, if there is an indication that you will make that much or more in 2023 as well.
- Net worth: You have a net worth of over $1 million. This can be individually or with a spouse. The value of your primary residence isn’t included in this net worth calculation.
Individuals can also be accredited if they meet certain professional criteria
Professional qualifications normally apply if you hold certain licenses or are part of an investment firm or fund. This could look like:
- Being a “family client” of a “family office” that is qualified as an accredited investor
- Executive officers, general partners (GP), or directors of the company that’s selling the securities
- “Knowledgeable employees” of a private fund (when an investment involves a private fund)
- Professionals who hold either the securities representative license (Series 7), investment adviser representative license (Series 65), or private securities offerings representative license (Series 82). These qualifications were added in 2020.
A family office is a company opened by an ultra-high-net-worth family. Generally, a family that would open one would have at least $50-100 million in assets to invest. They open the company to manage these investments. If you are a “family client” who’s part of a family office, and the family office is an accredited investor, you may qualify.
If you hold certain roles within a company selling securities, such as executive officer, GP, or director, you can also be accredited.
More specific rules for “knowledgeable employees” can be found on the SEC’s website, but in basic terms, a knowledgeable employee can be a director, executive officer, or someone who manages the private fund’s investment activities. The catch with this is that a person who qualifies under this rule is only seen as an accredited investor for the offerings that are put out by that private fund, or other private funds that their employer manages. It’s a limited scope in that way.
The license qualifications are straightforward. If you are in good standing with one of these licenses, you can qualify as accredited.
Entities can also be accredited investors
If you don’t qualify as an individual, you may be able to reach accredited status as an entity. There are reasons you might want to invest as an entity even if you’re individually accredited, including splitting the cost of investment.
Entities can qualify if one of the following is met:
- The entity owns investments that exceed $5 million
- All equity owners in the entity are accredited investors
- Corporations, LLCs, partnerships, trusts, 501(c)(3)s, employee benefit plans, “family office” and “family client” entities that have assets exceeding $5 million
- SEC-registered broker-dealers and investment advisers who are either SEC-registered, state-registered, or exempt reporting advisers
- Financial entities, including insurance companies, banks, registered investment companies, savings and loan associations, small business investment companies, business development companies, or rural business investment companies.
In essence, if your entity owns enough investments, everyone in your organization is already accredited, you have SEC registration, or are a financial entity that shows you have a level of financial sophistication and know-how, you could qualify to be an accredited investor as an entity.
What are the investment opportunities for accredited investors?
Many asset classes are open to accredited investors. Whether you’re interested in natural resources, private equity, or real estate, there’s bound to be an option that fits your interests and risk profile.
Natural resources & commodities
Commodities investing is broken into three categories – farmland and forests (wheat, cotton, cattle, etc.), energy (renewable, natural gas, crude oil, etc.), and metals (silver, gold platinum). Non-accredited investors can buy commodities on investment platforms like Stash through an Exchange Traded Fund (ETF), but accredited investors also have the option of buying into a commodity hedge fund.
Promissory notes
Promissory notes represent a promise between a borrower and a lender. The borrower is promising they will pay back the money they owe by a specific date. These notes can be secured or unsecured. A secured note includes property or collateral that can be seized if the borrower fails to pay back the loan. An unsecured note doesn’t include property to seize but may come with a personal guarantee. These can be appealing because they often come with interest rates that are higher than average.
Cryptocurrency and digital assets
While cryptocurrency and other digital assets are open to any kind of investor, we included this on the list because of how risky it can be to invest in this presently volatile category. With regulation still in limbo, and several companies facing crashes and legal consequences in 2022, there is a lot up in the air for crypto. Even stablecoins that were designed to keep pace with the value of the U.S. dollar experienced meteoric falls. Great rewards can come out of cryptocurrency investments with proper timing, research, and luck, but the risks have brought on a “crypto winter” that has made many investors gun-shy.
Private equity
Private equity is a kind of investment partnership where those involved invest in a private company or buy out a public company, and the nature of the investment can be described by three basic categories. Venture capital is done in the startup stage of a company to fund the growth of the organization that is seen as having good long-term potential. Growth equity is for companies that have strong indications of future growth but need more funding to keep growing. Buyouts are where private equity investors buy and restructure a company to improve operations and save a failing business.
REITs
By its nature, real estate is a more complex asset class, no matter how people invest in it. However, real estate has stood the test of time as a stable investment that often resists market influence, offers some protection from inflation, and as an investment class that generates long-term returns. Real estate investment trusts (REITs) can be purchased as ETFs, stocks, or mutual funds, and are open to any investors. However, when you invest in a REIT, you’re investing in a company that owns and usually also operates real estate that is producing income.
Crowdfunding
Crowdfunding is also open to accredited and non-accredited investors as of 2012. Through funding portals, any investors can participate in crowdfunding for businesses and real estate. We’ll talk more about options for non-accredited investors below. There are no limits for how much accredited investors can contribute.
Real estate syndication
One of the downsides of investing in REITs is that the properties are all part of a big list. You may not have a good idea of what’s included in the offerings or even know where to find them. Real estate syndication, on the other hand, offers a more tangible option for investors who want to see what they’re buying. A group of investors pool their resources to purchase a property and take returns through passive investing. Real estate syndication can include multifamily properties, self-storage units, land, warehouses, and other real estate assets.
Hedge funds
In hedge funds, individual investors pool their money and hedge fund managers use a variety of strategies to try and achieve strong returns separate from how the market is performing. They’re called “hedge funds” because they are “hedging” against any volatility in the market by attempting to diversify and mitigate risk. Hedge funds are usually seen as riskier than private equity.
What are the differences in 506(b) and 506(c) offerings?
When you’re looking at investing, you may hear mention of 506(b) or 506(c) offerings. These rules are attached to different investments based on who the issuers want to include in the investment and how much they are trying to raise.
The short answer is this: If you are an accredited investor, you can invest in either 506(b) or 506(c) offerings. You will be able to invest in 506(b) offerings. 506(b) investments also limit how many non-accredited investors can take part. The main difference beyond that is how general partners (GPs) need to verify accreditation for 506(c) investments.
Rule 506(b) allows GPs to raise money using as many accredited investors as they like and up to 35 non-accredited investors. These non-accredited investors need to be sophisticated and they also need to receive disclosure documentation on top of what accredited investors receive. 506(b) offerings also can’t be marketed publicly, so no general sales or communications around the deal can be sent to the general public.
While 506(c) offerings can be generally marketed and solicited, GPs need to take “reasonable steps to verify” that the investors are accredited or hire a third party to do so. Only accredited investors can participate in this offering. Due diligence may include reviewing income documentation on tax returns or other financial statements.
What should accredited or sophisticated investors prepare to invest in multifamily properties?
Once you’ve weighed your options and decided that real estate syndication will work for you, how do you get started? Here’s what you need to know about investing with us.
The minimum investment for Investream properties typically ranges from $50,000 – $100,000.
At Investream, we give accredited and sophisticated investors the chance to hedge their bets against inflation. We invest in off-market, high-quality multifamily properties while aiming to achieve consistent above-market returns.
What if I’m not ready to invest that much in real estate right now, but still want to start somewhere?
For investors who are not ready for that level or commitment, there are other options.
Tribevest is an investment platform where friends and family can group-fund an investment opportunity through an LLC and manage the investment through the platform.
Groups also have an option to open an LLC together and invest on real estate crowdfunding platforms like RealtyMogul starting at $5,000. Fundrise basic account minimum investments begin at $1,000. While these options offer a lower barrier of entry, you’re also more distant from the investments. You’re also not going to have regular contact with the decision-makers and managers running the investments. It can be a good place to start, but not necessarily a good place to stay if you’re looking to maximize your returns.
Quest Trust Company allows individuals to invest in real estate and more using a self-directed IRA. You can also invest in promissory notes, cryptocurrency, and private entities through a Quest Trust Company account. If you’re not able to reach accreditation status or want to get your feet wet in alternative investments, Quest Trust is a great way to do that.
Regardless of which investment you choose, be aware of any requirements or associated management fees. The more informed you are about how your dollars are being spent outside of the investment itself, the better you can understand your returns and what “good” will look like.
Want to learn more about real estate syndication?
If we’ve convinced you that real estate syndication is the next step in your investment journey, we’d love for you to join our community. Connect with us today!
