Found among the financial elite, an accredited investor is an individual or entity with the financial muscle to participate in exclusive unregistered investment opportunities. To qualify, the accredited party must meet certain financial benchmarks established by the Securities and Exchange Commission.
This means that while anybody can easily access stock market investments, accredited investors may get involved with high-risk, high returns ventures that are not available for less financially sophisticated crowds.
So what do these exclusive investment opportunities look like, and how can you get involved? In this article, we’ll discuss what it takes to be an accredited investor and how to leverage this status to fast-track your financial goals.
What Is An Accredited Investor?
An accredited investor is defined as a high net worth individual (HNWI) or a legal entity such as a corporation who can partake in potentially lucrative investment opportunities that do not get registered with the Securities and Exchange Commission (SEC). Accredited investor offerings are not available to the general public.
Regulation D of the Securities Act 1933 prescribes the conditions under which a high net worth party is eligible to qualify as an accredited investor, historically based on income and net worth. To be an accredited investor, you must tick two boxes:
- Individual investors earning an income of at least $200,000 during each of the past two years, or a combined income of $300,000 with your spouse. There must be a reasonable expectation of an equal or higher income in the next year.
- Individual investors with a minimum net worth of $1 million or a joint net worth of over $1 million with your spouse at the time of investment. The total net worth value excludes the individual/s primary residence.
For a private business development, company, or organization to be considered an accredited investor, it must either hold assets over $5 million or have at least one equity owner that qualifies as an accredited investor.
Amendments to The Accredited Investor Definition
In 2020, the Securities and Exchange Commission amended the benchmarks for investors to qualify as accredited, adding the following proficiencies:
- Individual investors with specific financial certifications, denominations, or qualifications.
- Certain competent employees within the financial sector, such as those with in-depth experience in a private fund.
- Investment advisors for the SEC or with state registration.
The Securities And Exchange Commission
The Securities and Exchange Commission is an independent United States federal government agency established in 1934, following the Wall Street Crash in 1929. It is a regulatory authority designed to protect investors by limiting participating parties to those with the financial muscle to absorb a significant financial loss and to regulate the financial markets to prevent similar crashes in the future.
The SEC specifies accredited investor benchmarks and regulates opportunities for accredited investors such as hedge funds, private equity funds, venture capital funds, and other projects such as private placements for real estate investments.
Accredited investment rules and regulations are determined and enforced by the SEC when appropriate, though it does not necessarily review and approve all accredited opportunities available to financially sophisticated investors.
How Do I Become an Accredited investor?
Accredited investors do not go through any formal process to qualify for restricted investments. An individual or entity’s status gets determined by the company selling unregistered securities.
There are several ways a company may verify your status as an accredited investor. You may be required to produce the following documentation to prove your financial suitability:
- W-2 forms or equivalent to prove your income from the past two years
- Tax returns
- Financial information, including assets you currently hold
- Proof of professional experience, certification, or credentials provided by the financial industry regulatory authority
It’s necessary for all accredited investors partaking in unregistered opportunities to manage their own due diligence process and match the credibility and suitability of investments to their risk profile.
Can I Be Accredited If I Don’t Have Investing Experience?
Accredited investors interested in contributing large amounts of capital to potentially high-risk projects are expected to have a minimum level of investing experience. However, this is not the case for every investor.
Plenty of knowledgeable and experienced investors do not yet meet the minimum financial requirements to become accredited investors. Likewise, some accredited investors have accumulated their financial status via means such as inheritance or a high-paying job and lack extensive experience as an investor.
Where Can I Find Low Minimum Investments?
Because accredited investors are considered financially sophisticated enough to undertake higher risks and potentially absorb a high financial loss, minimum investment amounts are typically high as well. It’s common for minimum investments to begin at six figures, with incentives to invest up to seven, though this is not always the case.
Real estate syndication commonly has minimum investment values upwards of $20,000, which is an accessible and affordable way for accredited investors to diversify into real estate. It’s not always granted that an accredited investor can leave their day job (especially in terms of guaranteeing income for the next 12 months), so many passively partner with a real estate syndication company and earn excellent returns over time.
Alternatively, mutual funds and index funds, real estate crowdfunding, and owning commodities like precious metals are avenues for accredited investors to invest with little money. Diversifying over different asset classifications is crucial for any investment portfolio, whether you are accredited or not.
Best Accredited Investor Opportunities
If you are an accredited investor, you can access opportunities that are closed to the general public. That’s because they usually entail higher risk, though when leveraged, offer incredible financial gains to the investor.
Let’s explore some of these offerings and how you can get involved.
Real Estate Syndication
Real estate syndication is a type of private equity real estate where a professional investor pools passive investor capital together to fund the acquisition, development, or operation of a large-scale property. The real estate assets invested in are typically highly profitable commercial properties, such as multifamily apartments or condos, that any individual investor could not afford on their own. Investment life cycles tend to range between the short to mid-term.
The Securities and Exchange Commission typically regulates syndicated investments. In many cases, these projects are not restricted to accredited investors. For example, sophisticated investors who have adequate capital, a sufficiently high net worth, and investing experience can often partake in syndication even if they’re not approved accredited investors.
Where many investments provide returns as either capital appreciation or passive income, real estate syndication provides investor returns with both. Investors take care of long-term goals and short-term goals in the same investment.
Pinto Capital is a private real estate investment company that syndicates highly profitable real estate deals with passive investors. To take advantage of lucrative passive income and diversification offerings, get in touch with the investing experts at Pinto Capital. Their professionals are committed to empowering investors to reach financial goals by educating them about options and providing a fully supported investing experience.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new addition to the world of real estate investments. Like syndication, crowdfunding pools investor capital together via online investment platforms and puts it to work with profitable real estate investments.
Crowdfunding platforms focus exclusively on multifamily property, commercial real estate investments, vacant land, or other real estate assets. Investors earn passive income from their investment, as well as gain capital appreciation once the asset gets sold.
Investments are typically held for a period ranging between five to ten years and are not considered highly liquid during this time. However, there are commonly secondary markets open for investors seeking greater liquidity in their investments. Many crowdfunding platforms are exclusively available to accredited investors, though some cater to non-accredited investors and provide low minimum investment opportunities.
Real Estate Investment Trusts
Like real estate syndication and crowdfunding, real estate investment trusts (REITs) are real estate investment companies that allow investors to diversify their portfolios into the real estate market without actually owning a physical asset.
Accredited investors can trade shares in REITs on the stock exchange and earn passive income in the form of monthly or quarterly dividends. Furthermore, to maintain investment trust status, REITs are required to disperse 90% of the revenue generated to investors. While REITs are an effective way to build diverse passive income streams, like any other stock, they are subject to stock market volatility. Additionally, REITs offer fewer capital appreciation benefits than real estate syndication.
There are two main types of REITs: equity funds and debt funds. Equity funds own physical real estate assets, and investors earn revenue generated by rental yield. On the other hand, debt REITs own mortgages and earn dividends in the form of interest.
While REITs are also available to non-accredited investors, some investment opportunities are exclusively for accredited investors.
Private Equity Funds
Private equity funds are an alternative class of investment that invests in private companies not listed on the stock exchange. When you invest in a private equity fund, your capital is managed by expert investors at a private equity firm.
For example, private equity fund managers may choose to purchase stakes in a company, thereby gaining a measure of control in the direction of the company. Fund managers can make decisions about the company’s direction, with the goal of making it more profitable.
Private equity deals serve the long-term investor clientele and typically have high minimum investments. Usually, you can expect the minimum to be in the millions, though at the lower end of the scale, you could be contributing six figures.
Hedge funds are a pooled investment fund that trades in more complex and liquid asset classes. Professional fund managers employ more sophisticated trading techniques, portfolio assembly, and risk management strategies to maximize returns in a short period. A hedge fund may place venture capital, participate in private equity investments, or invest in real estate, land, currencies, and other alternative investments.
Hedge fund managers commonly aim to outperform the stock markets with the fund’s returns. As an alternative investment vehicle, hedge funds attract individuals who seek market-beating returns or those who believe the fund will perform better than their own investment decisions.
The advanced nature of this investment channel means that investors are faced with high minimums of up to six figures or more and high fees. Often, those eligible to invest in hedge funds are extremely high-net-worth individuals that have the capacity to absorb a significant loss.
Venture capital is a type of private equity funding given to emerging businesses with high potential for growth in the start-up phase. Typically, early-stage companies seek venture capital investment as an alternative to traditional financing since the risk inherent in start-up businesses with high growth potential would necessitate higher financier interest rates than what is permitted by law.
Venture capitalists undertake this risk by injecting cash into the start-up in exchange for stakes in the company. Efforts are then directed to expanding lines of business and financing day-to-day operations. Any returns get shared between the venture capitalist firm and its investors.
A few examples of venture capital success include Google, a corporate unicorn established with the support of venture capital funds in its early growth phase. More recently, a digital mental and physical healthcare company, Noom, was minted as a unicorn in 2021 after a series of venture capital investments.
Venture capitalist accredited investor opportunities require a high minimum investment. Although, this sector generates sound equity multiples and can produce impressive passive income streams for accredited investors.
Asset-backed securities are a type of investment that pools different securities together, then sells them to accredited investors. The financial securities are backed by income-producing assets, such as home-equity loans, student debt, credit card receivables, and business loans.
Securities often only contain a portion of the underlying assets, which makes them particularly high risk. On the flip side, asset-backed securities provide the accredited investor opportunities to generate lucrative returns with this leverage. Typically returns are distributed in passive income from interest.
The benefits of asset-backed securities include protecting investors from high-risk debt products and opening access to an alternative investment class. However, an investor must pay due diligence and thoroughly research and understand the individual offerings. This asset class may produce a lower yield in the case of prepayment. While an investor does have a legal claim to the repayment of assets in the event of default, low repayment is a further risk.
Private placements involve the sale of securities such as bonds or stocks directly to chosen investors rather than as a public offering. Often, private placements raise capital to fund start-ups with high potential for corporate success. The company sells shares privately in return for cash.
A high level of risk is associated with private placements, and the money is often illiquid during the investment term. This investment channel is highly regulated and can entail caps on the extent of equity offered to investors.
Accredited investors may select a private placement because shares are not available on the public exchange or registered with the SEC. This can offer accredited investors greater flexibility with their investments, though it also indicates that the investments entail reduced regulation and transparency.
Investors are encouraged to perform thorough due diligence as the offering documents may omit certain facts or details. In many cases, it’s advisable to research beyond what is given in the offering documents to determine whether the investment matches the investor’s risk profile.
Angel investors are similar to venture capitalists as they provide capital to early-stage businesses in exchange for convertible debt or equity ownership. However, rather than targeting the growth phase, they tend to offer companies money at the seed stage, even as early as idea incubation before products and services hit the markets. Angels are comparable to private placements in many ways, though angels tend to have fewer discretionary elements when selecting eligible accredited investors.
While anybody could indeed provide capital to an early-stage company and call themselves an angel, there is a more formal process behind accredited investor opportunities for angels. This usually stems from companies seeking a broad range of investors to diversify financing and equity allocation.
The SEC regulates angel initiatives and caps the number of non-accredited investors that participate in formal angel agreements. These slots are commonly filled with family and close friends of the company founders. The accredited investor can find angel deals via online platforms.
What Are the Advantages Of Being An Accredited Investor?
Accredited investments would not exist as an exclusive and restricted investment opportunity if they didn’t come with excellent benefits. They say it takes money to make money, and this is a concept many accredited investors are familiar with. So what exactly are the benefits of attaining accredited investor status, and how can you use it to your advantage?
Access to Rare and Restricted Investments
While no investment channels are guaranteed, you have to be in it to win it. An accredited investor can access the same investments as non-accredited investors, as well as additional opportunities to gain better returns. Hedge funds are an example of how a person with accredited investor status can financially benefit from more potentially lucrative investments than the stock market or mutual funds.
Accredited investors must have the financial muscle to risk losing large sums of money without creating significant waves or damage to their financial situation. Opportunities for accredited investors are substantially riskier than those available to the general public. As a result, they offer the possibility of being significantly more profitable than regular investment channels, too.
This may sound unbalanced to non-accredited individuals. Though, consider that accredited investors commonly have a greater risk tolerance. The amount of money an accredited investor may be capable of losing without it impacting their overall finances may also be enough to financially destroy a non-accredited investor.
Diversification protects an overall investment profile from risk. While many accredited investors hold greater risk in specific areas in their profile, they also have a pathway to increased diversification through unique accredited investor opportunities.
If one high-risk project falls through or doesn’t measure up to the anticipated returns, it will not affect the investor’s entire profile if they have diversified across alternative investments or multiple asset classes.
Meaningful Investment Opportunities
If you’re getting involved in private equity, angel investing, or venture capital firms, you have the chance to invest in small businesses with missions and messages that resonate with you. Online platforms can connect you to start-ups in a diverse range of industries and at various stages in their life cycle.
This gives investors a pathway to enhance and support the businesses they believe are making positive changes in the world and investing from a more heart-centered place.
What Are The Disadvantages of Being An Accredited Investor?
It should be apparent that accredited investor opportunities allow individuals and legal entities to access highly profitable returns. Though the Securities and Exchange Commission has long established that there is good reason non-accredited investors have limited access to these projects, as outlined below.
Most projects that have a high potential for returns also carry significant risk with them. That’s why certain investments are only made available to individuals who meet the annual income and net-worth or investing experience benchmarks stipulated by the SEC. Should the investments fall through, accredited investors would be affected as a result, though not financially devastated.
Limiting these projects to accredited investors protects non-accredited investors from the potential financial issues rife during the 1929 market crash.
High Minimums And Fees
Successful accredited investor opportunities require a high level of skilled management by those with extensive experience in the financial sector. Therefore investors must pay higher fees than typical non-accredited investment options.
Additionally, high minimum entry to some investment channels can be off-putting to accredited investors – particularly the risk-averse and those starting to dip their toes into accredited opportunities.
Many Investments Are Illiquid
Many accredited investor options, such as hedge funds and venture capital funds, are illiquid for the investment term. While this can be a disadvantage to accredited investors, often illiquidity is of greater detriment to a non-accredited investor given the high minimums involved.
Of course, all investment channels have varying degrees of liquidity. If this is a notable factor for you, it would be wise to select an option with greater liquidity.
Frequently Asked Questions
- Do accredited investors get better returns?Â
In many cases, yes, since greater returns are most commonly derived from projects with greater risk. With that said, accredited investors additionally expose themselves to more extensive losses than non-accredited investors.
- What Are The Different Types Of Investors?
There are many different types of investors, including accredited and non-accredited investors discussed in this article. Sophisticated investors and qualified buyers are two additional types of investors you may come across.
- Sophisticated Investors
Sophisticated investors are defined by the SEC as an individual or legal entity with sufficient knowledge in finance and business to determine the merits and risk of a specified investment. This may include financing professionals such as accountants, bankers, and business owners. Sophisticated investors have fewer opportunities than accredited investors.
- Qualified Investors
A qualified investor or qualified buyer typically has a higher qualification threshold than accredited investor status and in turn, can access projects with greater risk and higher return potential. Qualified buyers gain eligibility for these projects based on elevated net worth and income benchmarks, as well as a demonstrated history of investing success.
- Where Can Non-Accredited Investors Invest?Â
There are abundant opportunities on the market for accredited and non-accredited investors to invest. All opportunities should be given proper consideration to ensure they match your investing goals, risk tolerance, and desired investment term.
Thanks to advances in modern technology, even if you’re not accredited, you can get involved in passive real estate investing, stocks, bonds, and cryptocurrencies with just a few hundred dollars.
Opportunities for accredited investors abound in today’s financial markets. If you meet the SEC’s financial and net worth qualifications, you can expose yourself to a new world of high-return investment vehicles.
That said, the risk associated with many of these investments is not to be taken lightly. Accredited investors face higher minimums and fees and risk greater financial loss than the non-accredited. If you’re participating in an accredited opening, it pays to do your due diligence.
One company that provides accredited investor offerings is Pinto Capital, a private real estate syndication firm offering excellent returns with reduced risk and low minimums. If you want to start benefiting from passive cash flow and capital appreciation, contact the investing experts at Pinto Capital to learn how to start moving towards your investment goals today.