private placement investment accredited investor family office john berlet

By John Berlet

It may not seem fair, but not everyone is allowed to make any investment they want. Exotic “alternative” investments, such as start-up companies and hedge funds, are exempt from many rules and regulations protecting ordinary investors.

In 2020, The Securities and Exchange Commission (SEC) updated qualification standards in Rules 506(b) and 506(c) of Regulation D under the Securities Act of 1933. The regulation also changed the definition of “qualified institutional buyers.” for Rule 144A of that same Act. The SEC currently defines an accredited investor as a person or entity who meets one or more of the essential criteria outlined below. If you are designated an “accredited” investor, you are someone considered to have the investment expertise and experience necessary to handle the risks of unregulated securities.

  • An accredited investor can be someone with an income greater than $200,000 annually. In the case of a married couple, that income must be $300,000 or more per year in each of the two prior years. Additionally, if you’re in this category of accredited investor, you must reasonably expect to earn the same or more in the current year.
  • Accredited investors may also be those with high net worth, exclusive of their primary residences. The SEC considers high net worth to be more than $1 million, alone or with a spouse.
  • You may achieve accredited investor status if you are considered a “knowledgeable employee” of specific investment funds.
  • Recent changes to the definition of accredited investor include financial professionals with valid Series 7, 65, or 82 licenses.
  • You may qualify if you are a “spousal equivalent.” Spousal equivalents are cohabitants who have a relationship similar to that of a spouse. Spousal equivalents can now pool their finances to qualify as accredited investors.
  • “Family offices” can be accredited investors as defined within rule 202(a) (11) (G)-1 of the Investment Advisers Act of 1940. Recent clarifications of this act allow family offices to participate in private funds as long as they were not formed just to acquire the security. Family offices must also manage at least $5 million in assets. An additional requirement for family offices is that they must be administered and operated by a competent person or persons who possess the knowledge and ability to evaluate the investment’s risks and merits.
  • Other entities not explicitly formed to invest in a deal with total assets of $ 5 million or more may be designated accredited investors.
  • In some instances, a previous business relationship with the deal sponsor may be enough to qualify you.

What kinds of investments are available to accredited investors?

As I mentioned, accredited investors can put their money into a wide range of assets.

These include venture capital, angel investments, private equity funds, hedge funds, and real estate investment funds. They may also invest in specialty funds selling securities called “private placements” or Security and Exchange Commission’s “Regulation D” offerings. Companies registering as a Reg D offerings are only required to submit basic information about the company, its’ officers, and the offering itself. Beyond that, it’s up to the private placement’s issuing company to provide any other documentation and information.

When you compare a Reg D offering to a publicly-traded stock, which must undergo a lengthy SEC application process and intense due diligence, it’s easy to see the risk potential, especially for novice investors.

How do issuing companies know that a person is accredited?

Even though the criteria for becoming an accredited investor are strict, there isn’t a centralized accredited investor verification process or database.

Instead, every issuing company must verify the status of their prospective investors before allowing them in on a deal. The company may ask for bank statements, employment verification, copies of relevant securities licenses, or tax returns.

How will qualifying as an accredited investor benefit you?

Like many securities rules and regulations, the rules for qualifying as an accredited investor are often arcane and challenging to interpret.

That’s why it isn’t surprising that many people do not realize they ARE qualified. Many people assume that investing in private deals is off-limits to them. They’re surprised to learn that they might be an accredited investor with access to a lot more investment choices and the potential for significantly higher yields than those available in the public markets.

Investing on Wall Street limits your diversification options. And, if you only have money in publicly traded stocks and funds, you are exposed to more systematic market risk. You may also create more diversification inside your portfolio as an accredited investor. Accredited investors are uniquely positioned to access alternative investments uncorrelated to the market. These investments include 506(c) multifamily syndications.

Summing it up: It may pay off to discover if you qualify as an accredited investor. As an accredited investor, you may have many more opportunities to invest in private offerings with higher yields. You also add a measure of diversity to your portfolio since you can now access many non-market-correlated alternative investments. Passive investment in 506(c) offerings is also a possibility. As always, it’s wise to discuss any investment decision with your attorney, CPA, broker, or other trusted financial professional.

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