Find out who is an accredited investor, brush up on history and clear up some common misconceptions about accredited investors.
You’re probably reading this because you want to invest in private placements. In that case, welcome!
Misconception About Accredited Investors
There’s no “process” or a certification exam or a piece of paper that exits that states a person has become an accredited investor. Instead, the companies that issue unregistered securities determine the investor’s status by conducting their due diligence prior to the sale.
History of Accredited Investment
Born out of the Great Depression, the Securities Act of 1933 is where the “accredited investor’ concept originated. The government wanted to protect people by keeping novice investors out of investments they didn’t have the knowledge or experience to objectively evaluate – That’s a good thing since uninformed investors are usually the ones that end up loosing more money than informed investors. This concept of protecting uninformed investors evolved through over the last few decades through things like:
Rule 4(a) (2)
Securities and Exchange Commission v. Ralston Purina co. court case
Rule 146
Regulation D (a.ka. ‘Reg. D’)
Definition of Accredited Investor
Within Reg D, Rule 501 ultimately defined what an accredited investor is. You’re an accredited investor if you meet any one of the following criteria.
- Your net worth is at least $1 million excluding the value of your primary residence
- You have a minimum income of $200,000 as an individual for the last two years with a reasonable expectation of achieving the same in the current calendar year
- Your combined income with your spouse is at least $300,000 for the last two years with a reasonable expectation of achieving the same in the current calendar year
Net Worth Explained
Net worth is simply DOLLAR VALUE OF YOUR ASSETS minus YOUR DEBTS or LIABILITIES.
Example: If your entire assets equal $500,000 and your debt equals $300,000 then your net worth is $200,000.
$500,000 (assets) – $300,000 (liabilities) = $200,00 (net worth)
Individual Vs Spouse Income Explained
Suppose you make $250,000 a year and your spouse stays at home with the kids with no income. You still qualify as an accredited investor under the individual standard so long as you have a reasonable expectation of achieving the same in the current calendar year. Point being, you don’t have to have $300,000 per year income just because you have a spouse.
Reminder accredited investors do not have to meet both income and net worth requirements. When met, any one of the three criteria mentioned in the definition above can make you an accredited investor.
Summary
Accredited investor or not, all investments have potential risks and benefits. It’s your money and your future, so it’s on you to educate yourself before investing. We are here to provide you with transparent investment opportunities, so you can make educated, informed, and sound Multifamily investment decisions.
