Nothing in this blog is or should be construed as investment advice or an offer or solicitation of offers of investments. Both Real Estate Investments and Securities offerings are speculative and involve substantial risks. Consult with your legal and investment professionals prior to making any investment decisions. All Securities are offered through North Capital Private Securities, Member FINRA/SIPC.
Pursuant to SEC regulations, some investment types are not registered with the SEC and are only available to accredited investors. This blog pertains to private investment opportunities, which may include a wide range of investments including investments in private equity, real estate, and private securities, among others. The limitations on investment in private, unregistered offerings to accredited investors are an effort by regulators to ensure that only those investors with sufficient sophistication and financial stability can invest in unregistered investments. These investments have less oversight than public securities and may be riskier.
Proving investor accreditation prior to investing in a private offering requires additional effort by the investor and the issuer of the offering, but doing so is a sign that the issuer is taking the necessary steps to abide by the legal requirements and confirm that the investment is potentially appropriate for the prospective investor given the investor’s particular financial situation and risk tolerance. Keep in mind that approval as accredited does not mean that the issuer is advising the investor in any way. The criteria issuers look at to confirm accreditation are limited very limited in scope and merely intended to assess sophistication and the investor’s ability to withstand loss. When investing in private offerings, investors should feel comforted when issuers conduct due diligence to confirm that the investor fits within the SEC defined safe harbor for accredited status. The purpose of this article is to provide a brief overview of the ways in which an investor can prove accredited status, and why investors should gain confidence in an issuer who requests documentation to confirm such status.
There are distinct but sometimes overlapping accreditation requirements depending on whether an investor is an individual or an entity. Either type of investor may prove accredited investor status by obtaining a letter with specific language attesting to their accredited status written by a registered broker dealer, registered investment advisor, licensed attorney, or licensed CPA. If you elect to obtain a letter, it is a good idea to request a template from the issuer of the investment in which you are trying to invest to make sure the letter contains all the required language. Other than obtaining a letter as described above, some common ways an individual may prove that they are within the SEC safe harbor definition of accredited investor status include proving:
- Income: Earned income that exceeded $200,000 individually (or $300,000 joint income with a spouse or spousal equivalent) in each of the prior two years and reasonable expectation of the same for the current year;
- Net Worth. A net worth over $1 million, either alone or together with a spouse (excluding the value of the investor’s primary residence);
- Employment: Status as a knowledgeable employee of an affiliated person or entity that manages the investment, or an executive officer of the investment issuer, or manager of the company issuing the investment;
- Professional license holder: An individual actively holding one of the following securities licenses: Series 7, Series 82, or Series 65, and in good standing with FINRA.
In addition to providing the letter described above, some common means of proving entity accreditation include:
- Membership: Entities including revocable trusts, partnerships, and limited liability companies in which all equity owners are accredited individually (see above);
- Assets: Entities not formed for the specific purpose of acquiring the investment at issue with assets in excess of $5 million;
- Note: the investor will need to provide sufficient documentation to show signatory authority on behalf of the entity and ownership percentages for individual owners who own a certain percentage of the investing entity, either directly or indirectly.
There are some other types of entities with unique qualification requirements including irrevocable trusts, entities formed for the purpose of acquiring the investment at issue, family offices, and foreign or governmental entities. Ask the issuer of the investment you are pursuing about accreditation requirements that suit your needs if you are interested in investing through an entity type not described herein.
An assessment of a prospective investor’s accredited status is not meant as investment advice, nor is it an endorsement of a particular investment for a specific investor, but rather an effort to ensure that the investors in the offering have the knowledge and financial stability to tolerate the risk inherent in private, unregistered offerings. When investing with private issuers, the additional time spent gathering appropriate documentation of accreditation should be reassuring to investors and it is evidence of a culture of compliance that is a positive indicator of the transparency, legitimacy, and trustworthiness of the issuer.