For investors eager to find premium opportunities, understanding how accredited investing works and how to get started is the first step into a broader, more lucrative financial world.
Here’s what you need to know about accredited investors, institutional investors, and the opportunities available to them.
What Is an Accredited Investor?
Some investment opportunities require proof of an investor’s ability to provide high capital yields; that’s where accredited investors come in.
Accredited investors are natural persons or financial entities that meet specific requirements that allow them to access investment opportunities otherwise inaccessible to conventional investors.
If one is a general partner, executive, or director of the issuer of offered securities, they are also an accredited investor. Some investment opportunities are too high risk to accommodate folks that don’t have the financial backing to sustain steep losses.
Establishing credibility afforded them by their financial sophistication, and other credentials distinguish an accredited investor’s capability to sustain and weather the potential risks of the prospective investment opportunities and business matters.
How Does Accredited Investing Work?
Accredited investing opens up a world of investment opportunities inaccessible through conventional avenues. But how?
Understanding how accredited investing works for individual and institutional investors gives you a better insight into the opportunities it presents.
The SEC And Unregistered Securities
While it may seem needlessly exclusionary to prevent investors access to specific opportunities based on their finances, there’s a reason why accreditation is required: accredited investors engage in investment opportunities that exist outside of standard investing channels, like unregistered securities.
These investment opportunities present far higher degrees of risk because they are not subject to the same scrutiny from financial bodies like the SEC. The Security Exchange Commission regulates exchanges by setting strict standards on what securities or investment opportunities can be traded on the market.
Any investment opportunity that seeks to trade using conventional platforms, like the stock exchange, must abide by standards to establish adequate protections for everyday investors.
Chief among them is that they must first register with the SEC before securities can be traded on the market. However, some investment opportunities operate outside the protected regulations of the SEC.
These opportunities present a high potential for a lucrative return. Still, by working outside the purview of financial regulatory bodies, the potential for serious risk warrants a certain financial standard for investors interested in getting involved.
Accreditation Frees Investors to Make Riskier, High-Potential Investments
The financial capability of accredited investors indicates they can withstand the risks posed by investment opportunities that aren’t registered with financial bodies. Because of their financial standing, the SEC deems them sufficiently accomplished in financial matters and, therefore, qualified to take on these risks.
Unregistered investment opportunities may have less transparency and do not need to make the same disclosures to their investors that other opportunities are required to make by law.
The loose strictures on these unregistered investment opportunities make them more opaque, which invites a certain level of risk. Investors aren’t entitled to the same amount of information about their performance.
However, the lack of strictures allows unregistered opportunities to effect greater potential returns for their investors. Unregistered investment opportunities have more freedom to utilize capital, access up-and-coming markets, and generate profits than standard investment opportunities.
Who Can Be Accredited Investors?
Accredited investors include more than just individuals and firms. The definition of accredited investor outlined by the SEC derives from the Securities Act of 1933, a law passed to bring cohesions, stability, and security to the stock exchange in the wake of the Stock Market Crash of 1929.
Laws about accredited investors have expanded over the years due to parallel legislation like the Investment Advisers Act of 1940.
The chief code for accredited investors, Regulation D in the Securities Act, establishes the basis of exemption for unregistered trading that allows accredited investors to exist. Rule 501 specifically designates the intended aim for individuals and financial bodies that can qualify as accredited investors.
These a list of entity types that can become accredited investors as per Regulation Dexemptions stipulated in Rule 501:
- Insurance companies
- Investment companies
- Rural business investment companies (RBICs)
- LLCs (limited liability companies)
- Registered investment advisers
- State-registered investment advisers
- Private business development companies
- Exempt reporting advisers
- Qualified institutional buyers (QIBs)
- Benefit plans over five million dollars
- Director(s), executive officer(s), or general partners issuing securities
What Is an Institutional Accredited Investor?
Institutional accredited investors are pillars in the financial world that sustain unregulated exchanges.
The finer points of the Securities Act of 1933 and subsequent updates to the law, such as rule 144a, allow for a range of new categories of financial entities to qualify as accredited investors. Entities that operate as businesses, funds, plans, and banks, may be considered institutional accredited investors.
By the sheer volume of their collective net worth, institutional accredited investors are effectively guaranteed to qualify for Regulation Dexemptions. These institutional entities create the financial ecosystem in which individual accredited investors make their investments. They are an integral part of the investment opportunities available to individual investors.
Banks manage the capital to exchange accredited investments; private funds have the pooled capital to make unregistered exchanges confidently; directors, general partners, and company executives manage the volume of capital that facilitates exchanges for individual accredited investors.
How To Become an Accredited Investor?
The Securities Exchange Commission sets the qualifications one must meet to become an accredited investor.
As the most prominent financial market watchdog, governmental bodies like the SEC must set qualifying thresholds to ensure that standards for accreditation sufficiently protect investors from risk.
While the SEC sets these standards, there is no legal process by which one gains accreditation.
Instead, the funds or financial bodies that receive the investments gather the necessary information from their investors to ensure that they qualify as accredited investors, per the SEC’s guidelines.
Financial Criteria for Individual Accreditation
Many qualifying investors are individuals not affiliated with any investment firm or financial body. Their investor status stems from their net worth, though amendments have been added to allow for spousal equivalents.
Once they surpass a certain monetary threshold, they are effectively qualified to act as accredited investors.
The financial criteria that distinguish an individual as an accredited investor are as follows:
- The individual must have a net worth valued over one million dollars from their total assets; net worth does not include the value of their primary residence; joint net worth may include shared income with a spouse or partner.
- The individual must earn an annual income of at least $200,000. With a spouse or a partner, annual joint income must exceed $300,000. The individual’s yearly income must be established for at least two consecutive years, with a strong indication that their income remains above these standards in the current year.
New Professional Criteria
The advantages of accredited investing aren’t solely ascribed to wealthy individuals; financial professionals can qualify as accredited investors and gain access to extraordinary investment opportunities.
Accreditation for financial professionals is required to operate in the world of Regulation D-exempt investments. Recent amendments to the Securities Act have opened the door for sufficiently experienced professional entities to qualify as accredited investors.
These amendments took effect on December 8th, 2020, intending to increase the yield of capable institutional accredited investors participating in Regulation D-exempt trading.
These are the qualifications that allow professional investment bodies to operate in the world of accredited investing:
- The investor must have a history of good standing, with professional certifications like a Series 7 general securities representative license, a Series 65 investment adviser representative license, or a Series 82 private securities offerings representative license. Holding these licenses demonstrates their financial acuity and capability.
- Companies executives selling unregistered securities are implicitly accredited: directors, GPs, and executives.
- Family clients: close family members of an accredited investor; family office: wealth management bodies that serve ultra-high net worth individuals (HNWI).
- Sufficiently knowledgeable employees who work on behalf of a private fund, such as fund researchers and analysts.
What Opportunities Are Available to Individual Accredited Investors?
Individual accredited investors have the following potential opportunities:
- Hedge funds
- Venture capital funds
- Private equity real estate funds
Hedge funds are the epitome of high-risk, high-reward investing accessible to accredited investors.
These funds are managed by career investors who operate in a limited partnership with accredited investors. Their exclusivity is their primary advantage. With fewer high net-worth individuals seeding the fund, hedge fund managers can conduct complex exchanges effectively.
Hedge funds utilize various investment strategies to generate returns for their backers, from short-selling to options trading.
While their financial sophistication promises above-average returns from conventional investment firms, hedge funds incur more considerable fees on their investors.
Crowdfunding opportunities for accredited investors have become increasingly popular as a relatively new investment strategy that suits the digital age. Crowdfunding works by pooling funds from a wide range of investors through internet platforms.
Typical instances of crowdfunding can range from charitable causes to product design and other projects.
More involved crowdfunding platforms specifically entreat accredited investors. These platforms may utilize crowdfunding platforms to trade equity; investors gain a share of a company based on the size of their investment.
Real estate crowdfunding allows accredited investors to pool their funds to acquire high-value properties they wouldn’t be able to purchase on their own. The crowdfunding model gives accredited investors a DIY alternative to institutional accredited investor options.
Venture Capital Investing
Start-ups and fledgling small businesses may have a novel product or service to share, but they don’t have the capital to produce it — that’s where venture capital investment comes in.
New businesses will appeal to accredited investors by offering equity in their burgeoning company for seed capital: capital used to sustain a new company’s growth that isn’t earning a profit yet.
Venture capital can be risky; start-ups may have a good idea that doesn’t work out in practice.
However, venture capital investments can be highly lucrative, as the significant shares of equity held by accredited investors explode with growth proportional to the start-up. Seed capital in a future success can net accredited investors a substantial return.
Real estate investment trusts effectively function as companies whose income-earning properties generate profits. REITs pool vast amounts of capital by selling shares of the trust as would a publicly traded company.
Whereas Ford Motor Company earns a profit on the sale of its products — automobiles — REIT shares are determined by the rental income earned by their collective assets.
REITs can offer a wide range of properties; some are niche specific, with designated models for storefronts, restaurants, retail stores, condos, and apartments.
While many REITs are publicly traded, others are private, requiring accredited investors to fund them. REITs allow investors to get involved in real estate without the burdens of managing properties.
Private Equity Real Estate Fund
Private equity real estate funds connect accredited investors with equity in high-value properties. While REITs earn a return on property income, private equity funds give investors equity owners of the property — in effect, the investor owns the property itself.
Are you interested in learning more about real estate investing? Consult our educational resources.
The funds are managed by real estate professionals that use strategies ranging from the acquisition of ultra-high-worth properties to speculative ventures in developing lucrative new properties.
The flexibility and focus of private equity real estate funds make them the best way for accredited investors to get into real estate.
What Works Best for You?
Choosing a suitable investment depends on your financial situation and current market trends. With inflation rising and the market in shambles, investors are turning to real estate because of its renowned stability and inflation-hedging properties.
There’s never been a better time to shore up your finances with real estate than now. For over four decades, Christina has endured severe bouts of market turbulence through intelligent, effective real estate investing.
Invest With the Best
Christina’s team of real estate experts has the resources, skill set, knowledge, and network to connect you with the most high-value assets in Los Angeles — the Westside.
Get started with us today and protect your finances for the future.