Are you an Accredited Investor?

When it comes to private placement offerings in real estate, one common term you will hear is whether or not an investor is "accredited". So what does this mean?

I'll start off this article by saying I am not an attorney and to consult your own council when it comes to legal advice. Now that we got that out of the way, let's explore what an Accredited Investor is, as well as how it applies in the world of real estate syndication.

The Securities & Exchange Commission (SEC) in the United States is a government regulatory agency that aims to protect investors and monitor the securities markets. An Accredited Investor is defined by the SEC as an individual whose level of sophistication warrants a reduced need for protection. In securities law, this is outlined in Regulation D, which is the regulation governing private placement offerings such as real estate syndications.

By the Numbers

Okay, so now we know the SEC will identify these individuals as having a little more sophistication, but concretely, what does that mean? The current law states that in order to be Accredited, you must meet one of two criteria:

1) Earning $200,000/year as an individual or $300,000/year with a spouse in each of the past two years with a reasonable expectation to continue earning this amount.

2) Have a net worth of $1 Million individually or with a spouse. This number does not include your primary residence.

How it Applies

In real estate syndications, Regulation D includes two exemptions that allow sponsors to legally raise capital for private offerings without having to register with the SEC: a 506(B) and 506(C).

At Rule72 (as of today), we focus on 506(B) private placements, so we'll start here. 506(B) offerings allow for up to 35 non-accredited investors in a given investment opportunity. Once those 35 investors participate, the rest must be accredited. The most important thing to keep in mind with 506(B) offerings is the sponsor(s) cannot advertise their deal to the public. So, you may be wondering how non-accredited investors hear about these private offerings. The SEC requires all investors and operators in a 506(B) deal to form a "substantive relationship" prior to any business being conducted with one another. Achieving a substantive relationship isn't perfectly black and white, but reasonable steps that pre-date the offer must be taken to form such a relationship. The sponsor has to reasonably evaluate the investor's financial situation, suitability, and overall ability to understand the nature of the investment.

506(C) private placements, on the other hand, don't require as many hoops to jump through. The sponsorship team is able to advertise these offerings to the public, because these opportunities will only allow for accredited investors to participate. No pre-existing relationship between the sponsor and investor is required in a 506(C) deal. One added step for the sponsor team is to hire a trusted 3rd party to verify the investor is, in fact, accredited. An alternative route could be handling this process in house by communicating with their accountant, but hiring a 3rd party will be more secure and less hassle.

You may be wondering if there's a way to accelerate your path to becoming accredited and unlocking the volume of deals you are free to invest in....and the answer is yes, there is. The Financial Industry Regulatory Authority (FINRA) administers a test known as the Series 65. For this exam, you are allotted 180 minutes to answer 130 questions related to financial laws, ethics, regulations, etc. The cost of the test is around $200. Although I have not personally taken this exam, I've heard from individuals that it isn't all that challenging.

Closing Out

To be considered an accredited investor, there are specific financial criteria to meet. If you do not meet them or simply do not want to wait to meet them, the Series 65 exam is available. Accredited investors have the freedom to invest in a many more private offerings that are presented in the market. You could see a deal that you like tomorrow on LinkedIn or other social platform and wire the money immediately to partake. Being non-accredited will still present countless opportunities in the marketplace, but adds some additional work through having to get to know the sponsor (which is probably a good thing at the end of the day). And be sure to always consult your attorney and for legal advice when needed!