If you’re just delving into the world of investing beyond stocks, mutual funds, and EFTs, you’re probably coming across a collection of new terminology and jargon that can be confusing – starting with accredited, sophisticated, and non-accredited investors.
Do you know which category you fall under?
These terms are essential to understand because they designate what type of investment opportunities certain investors have available to them.
Whether or not you’re an Accredited or Non-Accredited investor depends on your income and net worth. The Securities and Exchange Commission (SEC) set clear guidelines that Accredited Investors have to meet to access certain investment opportunities that are not registered with regulatory authorities (like the SEC).
Why do companies choose to offer investors opportunities that aren’t registered? Typically, because it saves them money. This kind of offering is called private placement. However, in the eyes of the SEC, private placement investments are higher risk, so they want to ensure that investors are sophisticated and financially stable enough to tolerate that risk.
Income and Net Worth Requirements
To qualify as an Accredited Investor, you need an income of $200,000 per year ($300,000 of joint income) for the past two years. Alternatively, an individual or couple can qualify if they have a net worth that exceeds $1 million, however, their primary residence cannot contribute to their net worth.
Often, pharmaceutical and medical professionals don’t realize that they qualify as Accredited Investors. Nor do they realize the incredible investment opportunities that open up to them with this investor qualification.
Additionally, in August 2020, the SEC made a significant definition amendment to an Accredited investor. Individuals holding Series 7, Series 65, or Series 82 licenses are now considered Accredited Investors. These licenses define their professional knowledge, typically in investing, banking, or finance. Therefore, those who hold these licenses are considered knowledgeable enough to be capable of assessing higher-risk investments.
How do you qualify?
Many investors erroneously believe that there is a regulatory body they must apply to to become an Accredited Investor, and that just isn’t the case. Instead, the burden of assessing financials and qualifying Accredited Investors falls on the company issuing the unregistered investment offering. Therefore, if you’re looking to invest with a syndication company or other investment option, don’t be alarmed when they ask you for proof of income and net worth.
If an individual or couple does not meet an accredited investor’s income or net worth requirements, they are categorized as Non-Accredited.
Non-Accredited Investors are only limited in so much as they cannot purchase unregistered securities.
Sophisticated Investors are Non-Accredited Investors that fall into an interesting grey area. They are investors with a high net worth that doesn’t necessarily meet Accredited Investor guidelines; however, they also have extensive experience in financial markets, which qualifies them to engage in more advanced types of investing.
Let’s expand on Sophisticated Investors with an example. Imagine a mortgage broker with fifteen years of experience who earns $150,000 per year, holds a stock portfolio of $300,000, and owns his primary residence but has no other assets. He does not qualify as an Accredited Investor, but his experience as a broker means he has the knowledge and acumen to assess investment opportunities. Therefore, the SEC provides that they are eligible to invest in unregistered securities such as pre-IPO securities, hedge funds, or real estate syndications.
Do you qualify as an Accredited or Sophisticated Investor and want to discover more about how you can become a passive investor in commercial real estate? Register to our Investor Portal for free now.
If you’re still on the fence about whether or not you qualify, get in touch with a member of our team for more information, and we will help you assess your investor qualification.