Accredited investors are individuals qualified to invest in apartment syndications by having annual income of $200k, or $300k for joint income, or a net worth of $1M (not including the primary residence).
An investor can become an accredited investor by meeting certain requirements that the U.S. Securities and Exchange Commission (SEC) has set in place. The accredited investor can be either an individual or an institution.
In the United States, these accredited investors are able to purchase securities that are not registered with a regulatory authority and not available to other non-registered / non-accredited investors. Since the SEC requires that securities become registered before being offered to the public, this allows accredited investors a “leg-up” on securities investments, as long as the issuer verifies the accredited investors meet the SEC requirements.
For the United States, the SEC outlines the requirements in Rule 501 of Regulation D.
The first requirement is annual income. The person must have an annual income from the last two years of at least $200,000 or $300,000 if they are married. It is expected that the same income (or higher) will continue for the current financial year.
The next requirement is net worth. Excluding the individual’s primary residence, the person needs to have a net worth of at least $1M.
Additionally, an entity can become accredited if it has assets that value at least $5M. If the owners of the entity are already accredited investors, then the entity may be considered accredited, as well. An exception is that the organization or entity cannot have been formed to solely purchase unregistered securities.
Although no formal process must be followed, in 2013 the SEC made it a requirement for sellers of unregistered securities to verify if the individual (or entity) qualifies as an accredited investor.
Usually, the seller will require the investor to fill out information such as their annual income, net worth, and recent financial statements. Occasionally, things such as a credit report and/or letters of review from financial advisors or attorneys will also be required by the seller.
While some could see it as inequitable to only allow those who meet these strict requirements the opportunity to be accredited investors, the reason is to protect investors.
The high-bar of requirements ensures that the investors are both knowledgeable about these kinds of investments and, should things go awry, be able to handle potential losses that can result from the investment.
An accredited investor has the opportunity to invest in non-registered securities because they meet certain criteria, such as high net worth and income, required by the SEC. These individuals are able to invest in opportunities with high returns because they are able to withstand the high risks that come with these non-registered securities.