If you’re looking to invest in certain higher-risk/higher-return opportunities, you may need to prove that you’re anaccredited investor. What is an “accredited investor,” you ask? An accredited investor is a person or entity that meets certain financial criteria, allowing them to invest in private offerings and other types of securitiesnotregistered with financial authorities. One way to prove your accredited investor status is by providing anaccredited investor letter, which we’ll be discussing shortly. Years ago, when I began investing inreal estate syndications, one of the first questions asked was about being anaccredited investor. I didn’t realize that if you’re looking to invest in certain types of complex or sophisticated securities, you may need to have accredited investor status. These individuals meet specific criteria set by the Securities and Exchange Commission (SEC) in the United States. If you want to be considered an accredited investor, you must meet one of the following requirements: It’s important to note that having this status does not necessarily indicate financial sophistication or investment knowledge. Instead, it measures financial resources and the ability toabsorb potential losses. Proving your status as an accredited investor isn’t always mandatory, but it becomes essential in certain situations, mainly when dealing with: If you want to learn more about real estate syndications (my favorite investment),check out this video:Key Takeaways
Join the Passive Investors CircleWhat Is An Accredited Investor?
Do You Have to Prove You’re an Accredited Investor?
These entities may require verification of your accredited status to ensure you can make smart financial decisions on your own.
For instance, if you plan on making a significant investment, it’s not uncommon for a company to want to verify your accreditation status.
I’m a co-general partner with theBlue Metric group,where we offer RV park syndication investments topassive investors. Most of our investments are 506c, which requires usonlyto take accredited investors.
Related article:506(b) vs 506(c) Syndication: What’s the Difference?
For some investments, companies might ask for tax returns or W2 forms, credit reports, and financial statements verified through a CPA or a third-party.
These documents help prove your personal or combined net worth, along with your understanding of financial matters, which is needed to become an accredited investor.
Apart from third-party websites, you can ask your Certified Public Accountant (CPA) to write a letter that confirms you meet the accreditation criteria.
In the next section, I’ll give an example of these letters and their use.
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CPA Accredited Investor Letter Example
Usually, websites that check if you’re an accredited investor ask for a letter from a CPA. This letter shows you have enough financial resources to be considered an accredited investor.
Also, these letters can serve as verification of your accreditation themselves. Plus, for most private real estate investments and funds, having a CPA letter is enough to show you’re accredited.
An accredited investor letter contains the following information:
- Date
- The investor’s name
- A statement saying you meet the requirements from The Securities Act of 1933, Regulation D, Rule 501
- Both the signature and printed name of the CPA
Accredited Letter Example
[Issuer Name]
[Issuer Address]
[City, State ZIP Code]
Dear [Issuer Name],
I am writing to verify that I qualify as an accredited investor under Rule 501 of Regulation D of the Securities Act of 1933. I meet at least one of these criteria:
- My individual or joint net worth with my spouse exceeds $1,000,000, not counting my primary residence’s value.
- My annual income was over $200,000 (or $300,000 with my spouse) for the last two years, and I expect to maintain at least the same income this year.
- I hold a significant role in the company offering these securities, such as director, executive officer, or general partner.
This letter serves to confirm my eligibility for investments under Rule 506 of the Securities Act. If you need more information or documentation about my accredited investor status, please let me know.
Thank you for considering this matter.
Sincerely,
[Your Name]
[Your Address]
[City, State ZIP Code]
Once you have this letter, you can start investing as a recognized, accredited investor. But is being accredited necessary for investing in real estate without actively managing it?
Let’s take a closer look.
Do You Need to be an Accredited Investor to Invest in Real Estate Syndications Without Being Actively Involved?
Manyreal estate syndications(group investments) require you to be an accredited investor to join a private fund. However, if the group raising the money follows SEC’s Rule 506 B of Regulation D, you don’t need to be accredited.
But, whether you need to be accredited or not can also depend on how much money the group is trying to raise. This affects whether they use Rule 506 B or 506 C of Regulation D.
Sometimes, a real estate syndication might ask for accredited investors, even if Rule 506 B doesn’t require it.
There’s another point to note. If the group uses Rule506 Bto raise money, theycan’t publicly advertisethe investment opportunity or its potential returns. This restriction can limit their fundraising, so some might prefer using Rule 506 C instead.
With Rule 506 C, they can fully advertise (i.e., social media, run ads, etc.) the investment but can only accept money from verified accredited investors, unlike with Rule 506 B.
Non-accredited investors might find it hard to locate these investment opportunities, even though they can invest in real estate syndications passively.
If you’re already an accredited investor, there might be a way to get verified for free. Let’s explore how you can get this free verification.
Join the Passive Investors CircleHow To Get Verified as an Accredited Investor for Free
If you want to verify your status as an accredited investor, some websites can do this for free.
Here are a few that you can use:
While these aren’t the only options available, they are known for being reliable. Keep in mind that other websites or ways of getting verified might charge a fee.
Entities as Accredited Investors
Entities can also qualify as accredited investors if they meet certain criteria. The following entities with assets inexcessof$5 millionare considered accredited investors:
- Corporations
- Partnerships
- Limited Liability Companies (LLCs)
- Trusts
- 501(c)(3) organizations
- Employee benefit plans
- “Family office” and any “family client” of that office
- Owners as Accredited Entities where all equity owners are accredited investors
- Investment Advisers
In addition to the above, any entity that owns more than $5 million in “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, and was not formed for the specific purpose of acquiring the securities offered, can also qualify as an accredited investor.
It’s important to note that theentity’s assetsdetermine the accredited investor status andnotthe individual net worth or income of its directors, executive officers, or equity owners.
However, if an entity is a general partner of a partnership or a trustee of a trust that is an accredited investor, then the entity can also qualify as an accredited investor.
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Investment Types and Opportunities
Investment Type | Description | Key Characteristics |
---|---|---|
Private Funds | Investment vehicles not registered with the SEC. | Includes private equity, hedge, and real estate funds; higher minimum investments and potential returns. |
Hedge Funds | Private investment funds using various strategies. | High minimum investments; strategies like long/short equity, global macro. |
Private Equity Funds | Invest in private companies for eventual sale or IPO. | Longer investment horizon, significant capital commitment. |
Venture Capital Funds | Invest in early-stage, high-growth potential companies. | High-risk, high-reward; significant returns if successful. |
Rural Business Investment Companies (RBICs) | Invest in small businesses in rural areas. | Licensed by USDA; focus on agriculture, renewable energy, rural healthcare. |
Private Placements | Securities offerings not registered with the SEC. | Available to accredited investors; includes equity, debt, and other securities. |
Business Development Companies (BDCs) | Invest in small and mid-sized businesses. | Regulated by SEC; potential for high returns with higher risk. |
Securities Offerings and Offering Exemptions | Ways for companies to raise capital without SEC registration. | Includes Regulation D, A, and Crowdfunding offerings; for accredited investors. |