There are so many different types of investments out there, and it can be hard to determine which investments are riskier and which ones might be a better fit for your goals. Regulators like the Securities and Exchange Commission (SEC) can’t possibly oversee and regulate every single investment out there, but they want to protect individuals who may not have the financial cushion to absorb major losses or fully understand all the risks associated with their investments. Therefore, there are certain classes of investments that are made available only to certain individuals, accredited investors.

Accredited investors are able to invest in investments such as hedge funds, startup businesses, venture capitals, private equity funds, real estate investment funds, real estate syndications, and angel investments. The SEC sets regulations and federal securities laws because these types of investments are exempt from multiple rules and regulations that help protect a non-accredited investor from the risks involved with these types of investments, as well as financial and business matters they might not be familiar with. These types of exempt securities offerings are called private placements. While some private placements can be open to non-accredited investors, such as 506(b) offerings, the investor must have a personal connection with the investment lead or sponsor. This is why many private placements are open to accredited investors only under a 506(c) offering.

Am I an accredited investor?

An accredited investor must meet certain requirements, either financial or professional, as laid out by the SEC. There is no federal verification process to identify whether you are accredited. Instead, the companies who you invest with, depending on the type of private placement offering, might have to check your accredited status by asking you to self-verify your status, requesting you to provide a letter from your CPA, attorney or financial advisor attesting to your status, or having you work with a third-party provider to verify your status with some basic financial statements like tax returns and the like.

As long as you meet at least one of the following requirements, you are considered an accredited investor:

Income Requirement

Under the income requirement, you must have an annual income of $200,000 (or $300,000 for joint income with a spouse or spousal equivalent), have been at this income level over the last two tax years, and expect to earn the same or higher income in current tax year. A spousal equivalent is defined as a cohabitant that has a relationship equal to that of a spouse.

Net Worth Requirement

Under the net worth requirement, you must have a net worth of $1 million or more, excluding your primary home, either on your own or together with your spouse or spousal equivalent. To calculate your net worth, add the value of all of your assets, i.e. investments, savings, etc, and then deduct from it all of your liabilities or any debt. Remember to not include either the value or mortgage (up to the fair market value) on your primary home.

Professional Requirement

Under the professional requirement, you must be or have one of the following:

• - Certain professional certifications, designations, or credentials like the Series 7, Series 65, and Series 82 licenses certified by the Financial Industry Regulatory Authority (FINRA)
• - Individuals who are “knowledgeable employees” of a private fund
• - SEC- and state-registered investment advisors
• - Directors, executive officers, or general partners (GP) of the company selling the securities
• - Any “family client” of a “family office” that qualifies as accredited

It is important to note that for those who qualify as accredited based on their status as knowledgeable employees, they are considered accredited only for offerings managed by their employers. Therefore, they can’t use their status as a knowledgeable employee to invest in other offerings.

Can An Entity Be An Accredited Investor?

An entity can be considered an accredited investor but the criteria is a little different. For an entity to be considered accredited, it must meet one of the following requirements:

• - Maintain a total asset or investment value of $5 million or more
• - All equity owners of the entity must be accredited investors themselves
• - Investment advisers (SEC- or state-registered or exempt reporting advisers) and SEC-registered broker-dealers
• - A bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company

The main restriction for entity accreditation aside from financial metrics is a prohibition against forming the entity for the specific purpose of investing in securities - similar to an investment company.

Accredited investors have greater access to investment opportunities, which can allow you to make even more money and grow your wealth over time. And although all investments carry risk, accredited investors must be more careful and perform their own due diligence as the offerings that open up to them have less oversight.

Let’s connect to see how Bluefox Ventures can help you diversify your portfolio by investing in alternative assets like multifamily real estate.

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