There are some opportunities that conventional investors simply cannot access. For folks committed to getting full access to the best possible investments, accreditation is a necessity.
Here’s what it means to be accredited and how to find the best investment opportunities for accredited investors.
What Are Accredited Investors?
Accredited investors are natural persons or legal entities with special access to unconventional investment opportunities due to their high net worth.
Many investment opportunities thrive on open access to everyday Americans; people can freely trade securities on the stock exchange, like stocks and bonds. Conventional trading opportunities have protections in place that safeguard investors from the risks of investing.
Holding a share in a company that goes bankrupt doesn’t put conventional investors on the hook.
The high net worth of accredited investors indicates two advantages that allow them to pursue alternative, unprotected investment opportunities:
- Their high net worth establishes a sufficient financial acuity
- They have the wealth to endure riskier investments
How Does Accredited Investing Work?
The legal basis for accredited investing stems from the Securities Act of 1933. In the wake of the Stock Market Crash of 1929, the federal government took the initiative; governmental
bodies like the Securities Exchange Commission, the SEC, were created to monitor and regulate the market, protecting investors from risk by establishing strict and clear guidelines on investment practices.
For instance, all securities must first be registered with the SEC in order to be traded on the exchange. In so doing, the federal government can set up financial safety nets that protect investors from disaster in the event of market downturns; companies in the federal register must abide by specific qualifying standards to trade.
But there are alternatives to trading opportunities found through the federal register.
Accredited investors have access to investment opportunities that do not register with the SEC. Regulation D exemptions in the Securities Act establish the legal opportunities to become accredited investors.
If an individual meets the criteria, they are exempt from the common standards for trading and gain the freedom to make a high-risk, high-return investment outside the federal register.
High Risk, High Return
Accredited investors have the clemency to deal with unregistered investment opportunities because they possess the wealth to withstand the risks posed by these unconventional financial endeavors.
The fact that accredited investors have the means to get involved in the first place is convincing enough to regulatory government bodies that they can take on these risks.
The financial interactions in which accredited investors participate present a higher degree of risk; their capital is directly infused into their investment. If the investment collapses, accredited investors could stand to lose more than their investment.
Alternatively, the rewards are far higher than conventional trading opportunities. Accredited investors have good reason to utilize their financial privilege with greater access to equity, deep financial sophistication in trading opportunities, and more explosive potential.
How To Become an Accredited Investor?
There is no accreditation certificate, per se, accredited investors receive upon qualifying. Instead, the funds, firms, and investment opportunities themselves audit a potential investor’s finances to establish their accredited status.
Qualifying for accredited status depends on an individual’s net worth and annual income
over a designated period. Individuals that meet those criteria implicitly operate as an accredited investor; establishing accredited investor status is a matter of maintaining clear records demonstrating an individual’s financial capability.
Financial Criteria for Individual Investors
Rule 501 in the Securities Act outlines the financial criteria individual people must meet to qualify as accredited investors:
- The individual must have a net worth of at least one million dollars, not including the value of their primary residence. Joint net worth between a spouse or partner qualifies for accreditation.
- Individuals must have an annual income of at least $200,000. For a joint income between a spouse or partner, yearly income must be at least $300,000. This annual income level must be consistent for two preceding years and remain likely to stay consistent in the current year.
Why Should You Become an Accredited Investor?
The advantages of attaining accredited investor status are simple: you gain access to better investment opportunities.
Accredited investors don’t just have more options; they have better options. While unregistered investment opportunities pose an increased risk, their benefits far outweigh the drawbacks.
For one, the level of professionalism and financial sophistication serving an accredited investor’s interests is the best in the industry. Accredited investors have access to the best people, the best opportunities, and the best possible return on their investments.
What Opportunities Do Accredited Investors Have?
There’s a whole world of opportunity for accredited investors to explore. From sophisticated securities trading and start-up seed money to real estate equity, the potential capital gains available to accredited investors show the scope of their freedom.
Hedge funds are elite pooled investment funds that utilize many investment strategies. Usually centered on liquid assets, like securities trading, hedge funds are managed by career financial professionals.
These managers employ diverse methods to generate their investor’s substantial returns: short-selling, options, leveraging, and derivatives.
High net-worth accredited investors are the primary source of hedge fund capital. Managers use exclusive investor pools with limited partnerships.
Advantages of Hedge Funds
Hedge funds supply their investors with substantial returns. The specialty of their managers allows investor capital to be optimally utilized across trading sectors. In both a rising market and a falling market, hedge funds can earn a profit due to their flexible function. Hedge funds have some of the most talented financial minds at their head.
Disadvantages of Hedge Funds
While hedge funds can be lucrative, they can also be extremely risky. As talented as hedge fund managers can be, they can’t predict the future; there will always be a decent chance that their investments don’t go as planned, putting investor capital in peril.
Moreover, hedge funds are not required to make the same disclosures that are standard with conventional mutual funds.
A novel investment strategy available to accredited investors is crowdfunding. This means of raising money has evolved quickly as the internet has become an increasingly popular means for high-end investing.
While crowdfunding is most commonly associated with charitable donations, many start-ups and commercial enterprises have turned to exclusive crowdfunding platforms to generate seed capital from high-net-worth individuals.
Platforms like these give accredited investors direct and early access to investment opportunities.
Advantages of Crowdfunding
Investors can have more freedom of choice over where they choose to put their money. Rather than going through a dedicated fund with managers, researchers, and analysts, crowdfunding platforms are slightly more DIY.
Investors have more input on where they decide to invest and, therefore, more control of their finances.
Disadvantages of Crowdfunding
Without financial professionals to manage where capital goes, crowdfunding can quickly spiral out of control for intrepid investors. An individual accredited investor is unlikely to have the same experience as a professional manager.
The lack of professional guidance can easily translate to murkier investment decisions. Results could quickly become catastrophic for investors who decide to pick and choose their investments through crowdfunding platforms.
Venture capital is critical for start-ups and fledgling businesses getting off the ground. Venture capital funds connect high-potential start-ups with the initial capital to get through their crucial beginning stages, like product testing, market research, and prototyping.
Every business starts somewhere. Venture capital investments connect accredited investors in this early stage of a business’s life.
Advantages of Venture Capital
Start-ups are willing to confer significant benefits to investors the earlier they get in with their investment. Helping a business successfully launch puts accredited investors in a position where they can negotiate a lucrative deal for substantial amounts of equity in the company. The business’ success is the investor’s success.
Disadvantages of Venture Capital
For every successful business, dozens more have tried and failed. Backing the wrong company could lose investors vast amounts of money. If the business goes under, investors may lose more than their investment; they could be on the hook for much worse financial woes.
Real estate investment trusts, or REITs, are trusts whose profits are generated by income-earning real estate assets. First started in the 1960s, REITs allowed people to access massive swaths of real estate assets by selling shares of the total portfolio.
REITs can be broad-based, with a loose focus on condos and apartments, or specific towards a particular niche, like retail storefronts. Private REITs provide exclusive opportunities for high-net-worth individuals and accredited investors.
Advantages of REITs
REITs give investors the opportunity to diversify their portfolio with real estate assets. Furthermore, they can produce substantial dividends, as REITs are required to distribute profit amongst shareholders—these dividends can be even better in private REITs due to their exclusivity.
Whereas real estate management can be an immense burden on property owners, private REITs offer investors the opportunity to get involved without their time costs.
Disadvantages of REITs
Many REITs are financially hamstrung due to legal requirements that keep them from the kinds of profit that yields more robust growth and returns.
When it comes to real estate investing, REITs don’t have the same opportunity for explosive returns that other property-based methods have.
Private Equity Real Estate Funds
Accredited investors can get as close to real estate as possible through private equity real estate funds. These funds are exclusive limited partnerships between fund managers and accredited investors centered on the acquisition of equity in high-value real estate.
These funds are run by financial professionals with expertise in the real estate world. They use sophisticated investment strategies to utilize premium real estate for the best possible return. This includes anything from private equity in high-value properties to investments in the future development of properties from vacant lots to luxury condos.
Advantages of Private Equity Real Estate Funds
Private equity real estate funds can give accredited investors the full scope of what real estate assets can offer, like rental income, properties flipped for massive profits, and developing high-potential properties.
Funds are flexible and follow tailor-made strategies for success that allow them to thrive in various environments. Real estate opportunities that would otherwise be inaccessible to individual investors can make it to your portfolio when you invest with a private equity fund.
Disadvantages of Private Equity Real Estate Funds
Real estate is a long-term real estate asset due to its relative illiquidity. Private equity real estate funds tend to be long-term investments, often requiring investors to make yearlong commitments with the fund before signing on.
Which Opportunity Is the Best?
Determining what opportunity works best for you depends entirely on your financial situation and current trends influencing the market. Economies across the globe continue to feel the pain of rising inflation.
Investors should take a hard look at their finances and the economy’s current health before making any decisions.
Real estate markets tend to prevail during periods of inflation. In fact, rising prices can be a benefit to property value and rental income. As prices continue to rise, investing in real estate with a private equity real estate fund may not only protect your finances from a weakening dollar but it can also help strengthen your finances.
Invest With the Best
Christian has thrived for over four decades in the most competitive real estate market in Los Angeles — the Westside. Westside neighborhoods don’t just have some of the best real estate in the city but some of the best real estate in the country.
High-value Westside real estate is a blue-chip investment that could help shore up your portfolio from whatever economic uncertainties lie ahead.
Get started with us today and help protect your finances from tomorrow.