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Accredited investors are a specific group of individuals and entities who are allowed to participate in investment opportunities that are generally not available to the public. This designation is typically given to those who have a high net worth, substantial income, or certain professional knowledge or experience.
This article will delve deeper into the concept of who are accredited investors, highlighting who qualifies, what benefits they enjoy, and the risks they may face.
Accredited Investor – Defined
The term “accredited investor” is most commonly used in the United States and is defined by the Securities and Exchange Commission (SEC). An accredited investor meets specific income or net worth criteria set by the SEC. These criteria are in place to ensure that the investor can bear the financial risks associated with private investments.
In general, to be considered an accredited investor, an individual must:
- Have an individual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 in each of those years, with a reasonable expectation of the same income level in the current year.
- Have a net worth exceeding $1 million, either individually or jointly with a spouse, excluding the value of the primary residence.
Certain entities, like banks, private business development companies, or large employee benefit plans, may also be considered accredited investors. Additionally, an individual with certain professional certifications, designations or credentials recognized by the SEC, or those who are “knowledgeable employees” of a private fund, can also qualify as accredited investors.
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What are the Benefits of Being an Accredited Investor?
Accredited investors have access to a wider range of investment opportunities than non-accredited investors. These opportunities include private placements, venture capital, private equity, and hedge funds. These types of investments are typically not registered with the SEC, meaning they might not have the same level of oversight and transparency as public offerings.
The primary advantage of these investments is the potential for higher returns. Since they are less regulated, they often come with higher risk, but this risk can be offset by the potential for significant gains.
What are the Risks Associated with Being an Accredited Investor?
While the potential for higher returns is appealing, being an accredited investor is not without risk. These investments are often more volatile and less liquid than public market investments. They may not provide as much information to investors, which can make it more challenging to assess their true value or potential return.
Additionally, the lack of regulation can also mean that there is a higher risk of fraud. Accredited investors need to exercise due diligence and potentially seek professional advice before engaging in these types of investments.
Investment Options for Accredited Investors
Having delved into the world of accredited investors, their benefits, and requirements, it’s time to explore some of the investment opportunities that are unique to them. These range from agriculture to commercial real estate and offer a variety of entry points in terms of minimum investment amounts.
Here’s a list of some investment products exclusively available to accredited investors. This list should serve as a starting point for your research. Remember, investing always carries risk, and it’s essential to thoroughly investigate any opportunity before committing your funds. Let’s dive in.
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FarmTogether
FarmTogether is an innovative platform offering a unique investment opportunity to accredited investors who are interested in diversifying their portfolios with agricultural investments.
FarmTogether operates with a focus on US farmland, offering investors the chance to directly invest with minimal fees. They provide multiple investment options, from crowdfunded offerings for purchasing fractional shares, to bespoke offerings that allow investors to become sole owners of a property.
What makes FarmTogether stand out is their Sustainable Farmland Fund. This fund requires a minimum investment of $100k, granting investors access to a diverse portfolio of farmland, allowing for instant diversification of their financial portfolio.
Click here to learn more about FarmTogether and explore if it aligns with your investment goals.
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First National Realty Partners
First National Realty Partners is a premier real estate investment platform exclusive to accredited investors.
The operation of First National Realty Partners is similar to a real estate investment trust. They own and lease properties, and investors receive dividends, with the added potential for capital appreciation.
What differentiates First National is their focus on institutional-quality offerings. In particular, they invest in retail spaces featuring stable, national brands like Aldi, Dollar Tree, or Walmart.
Investing with First National requires a minimum of $50,000 per deal. The asset management fee ranges from 0.5% to 1.5%, depending on the deal. Since 2015, over 1,400 investors have seen an average return of 12% to 18%, significantly outperforming the stock market.
Click here to find out more about First National Realty Partners and decide if it’s the right opportunity for you.
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EquityMultiple
EquityMultiple is a distinctive platform that combines traditional real estate investing with crowdfunding. The platform’s goal is to deliver higher returns than typically associated with traditional real estate investments.
Compared to other firms, EquityMultiple has a relatively low entry barrier. The minimum investment for real estate notes is $5,000, while for direct investments and investment pools, it’s $10,000 and $20,000 respectively.
Backed by Mission Capital Advisors, EquityMultiple was founded with the aim of offering more commercial real estate opportunities than traditional REITs.
Accredited investors appreciate EquityMultiple for its wide range of asset classes and offerings, including preferred equity deals, senior debt deals, and more. Investors have the flexibility to either concentrate their investment or diversify across multiple opportunities.
Click here to find out more about EquityMultiple and explore its offerings.
RealtyMogul
RealtyMogul is a crowdfunded real estate platform seeking to deliver higher returns than traditional markets. It’s available to both accredited and non-accredited investors.
RealtyMogul stands out due to its low financial investment minimum of $5,000, making it one of the most accessible alternative investment platforms reviewed.
Established in 2012, RealtyMogul has grown significantly in recent years. They have financed over $2 billion in property value, with investors receiving more than $170 million in profits.
Despite its growth, RealtyMogul is still relatively new and doesn’t have the backing of a major firm like EquityMultiple. Other potential downsides include a relative lack of liquidity and varying fees for different investments.
RealtyMogul offers a variety of investments which may appeal to investors looking to diversify. However, some of their rules are complex and may be daunting for even relatively experienced investors.
Click here to find out more about RealtyMogul.
CrowdStreet
CrowdStreet is a platform that grants accredited investors access to a variety of real estate projects. These include private equity investments, single-asset projects, and funds.
One of the fastest-growing crowdfunded real estate platforms, CrowdStreet features an intuitive website, educational resources, and the opportunity to earn passive income and capital appreciation on real estate through fractional ownership.
The main drawbacks of CrowdStreet are the relative illiquidity of your alternative investment and a hefty account minimum of $25,000. Despite these, CrowdStreet remains exclusive to accredited investors, for whom this amount may not be a significant investment.
While CrowdStreet has a thorough vetting process, the success of projects can vary, as is common in real estate. As always, conducting your own due diligence is advisable.
Click here to learn more about CrowdStreet and assess if it fits your investment strategy.
Understanding Accredited Investors in Business Matters
While accredited investors often have access to a wider array of opportunities compared to their non-accredited counterparts, the increased risk associated with these investments makes due diligence and business acumen crucial.
Furthermore, these investors often engage in complex business matters such as dealing with unregistered securities, venture capital funds, and private equity ownership.
Unregistered Securities and Accredited Investors
Unregistered securities are securities that are not registered with the SEC. These are often offered to accredited investors in the form of private placements. Under federal securities law, issuers can offer these securities without having to meet some of the regulatory requirements that apply to registered securities.
The higher risk associated with these securities necessitates that only investors who meet certain qualifications, such as income thresholds or net worth, can invest in them.
Venture Capital Funds and Equity Ownership
Venture capital funds represent a prospective investment opportunity for accredited investors. These funds pool money from investors to invest in early-stage companies with high growth potential.
As equity owners, these investors have a direct stake in the success of these businesses. However, these investments are often considered high risk because they involve companies that are not yet profitable or are still in the early stages of development.
Tax Returns and Income Thresholds
To qualify as an accredited investor, individuals often have to meet certain income thresholds. In the United States, this includes having an annual income exceeding $200,000 individually, or $300,000 jointly with a spouse, for the last two years, with the expectation of earning the same amount in the current year. The SEC typically verifies these income levels using tax returns.
Family Offices and Accredited Investor Status
A family office is a private wealth management advisory firm that serves ultra-high-net-worth investors. Family offices are considered accredited investors if they have at least $5 million in assets under management and their investment decisions are made by a knowledgeable employee.
These entities can invest in a wide range of assets, including mutual funds, private equity, real estate, and direct investments in private companies.
Insurance Companies as Accredited Investors
Insurance companies, along with banks and mutual funds, are often considered accredited investors. These entities have a large amount of assets under management and a high level of financial knowledge and sophistication, making them capable of handling the risks associated with investing in private markets.
Natural Persons as Accredited Investors
Natural persons are individuals who qualify as accredited investors due to their income or net worth. In recent changes by the SEC, natural persons can also qualify if they hold certain professional certifications, designations or other credentials, expanding the pool of individuals who may qualify as accredited investors.
In conclusion, being an accredited investor provides access to a wider range of investment opportunities. However, it also necessitates a higher level of financial sophistication and understanding of business matters due to the increased risks associated with these investments.
What is an Accredited Investor – Final Thoughts?
Understanding the concept of an accredited investor is a critical step for those seeking to navigate the complex world of investment. Accredited investors, by virtue of their financial acumen, income, net worth, or professional experience, are granted access to investment opportunities generally not accessible to the public.
Being an accredited investor unlocks a vast array of opportunities, from venture capital and private equity funds to real estate investment and fine art. These investments often promise higher returns, but they come with higher risks due to the nature of the assets involved and their less regulated status.
Importantly, accredited investors are presumed to possess the financial wherewithal and knowledge to navigate these risks. This status allows them to invest in unregistered securities, which are securities not registered with the SEC and typically reserved for more sophisticated investors.
For natural persons to qualify as accredited investors, they must meet specific income or net worth criteria. Certain entities, such as banks, mutual funds, and insurance companies, are also considered accredited investors due to their large asset bases and financial sophistication.
However, prospective accredited investors must bear in mind that while the potential rewards are high, the associated risks are substantial as well. These risks include increased volatility, reduced liquidity, and higher susceptibility to fraud in some instances. Thus, prudence, due diligence, and possibly professional advice are vital before undertaking these investments.
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