If you’ve looked into real estate investment opportunities before, chances are you’ve come across opportunities that require you to be an accredited investor. But what exactly does being an accredited investor mean? Why are some opportunities only available to accredited investors? Do you qualify as accredited -- or, if you don’t currently, could you in the future? We’ll break it down for you in this post.
What are Accredited Investors?
So, what is an accredited investor? The answer can be found in Rule 501 of Regulation D of the Securities and Exchange Commission (SEC). According to the SEC, an accredited investor is "a person who meets certain standards of wealth and sophistication." These standards are in place to protect investors from scams and fraudsters.
There are two main ways to qualify as an accredited investor. The first is by earning an income of $200,000 or more (or $300,000 or more for joint incomes) for the past two years with the expectation that this income will continue into the future. The second is by having a net worth of $1 million or more, either individually or jointly with a spouse.
Investors who meet either of these criteria are considered "sophisticated" enough to understand the risks associated with certain types of investments, such as hedge funds and private equity offerings. They are also assumed to have the financial resources necessary to weather any losses that they may incur.
Accredited investors also have access to investment opportunities that are not available to non-accredited investors. For example, hedge funds and private equity offerings are only open to accredited investors. This is because these types of investments tend to be high-risk and involve a large amount of money.
What are Non-Accredited Investors?
A non-accredited investor is thus anyone who does not meet the criteria outlined above. They do not meet the net worth or annual income requirements to be labeled as accredited by the SEC. As you may imagine, the vast majority of people fall into this category.
Since non-accredited investors are not as experienced in investing as are their accredited counterparts, the SEC closely monitors and regulates the sale of investment securities to non-accredited investors to help protect them from fraud and misrepresentations.
Investment Opportunities for Accredited vs. Non-Accredited Investors
Because accredited investors are viewed as savvier when it comes to understanding the ins and outs of financial transactions, they are afforded more leeway in the kinds of opportunities in which they can invest. Many of the most potentially lucrative investment opportunities also carry a correspondingly high level of risk and have therefore traditionally only been available to accredited investors.
Examples of such opportunities include:
- Hedge funds
- Venture capital and private equity funds
- Most real estate investments
Selling securities to non-accredited investors, by contrast, is governed by many more rules and regulations. Companies interested in offering securities to non-accredited investors are required to disclose a large amount of financial information -- both about the securities being offered and about the company offering them -- on a regular basis so those interested in investing can have the necessary information to make an informed decision.
As you can imagine, putting together the systems and processes necessary to create such regular disclosures is time-consuming and costly; as a result, many companies choose to bypass the regulatory requirements of selling to non-accredited investors and instead cater to accredited investors only.
However, recent changes in regulatory law has made it easier and more cost-effective for companies to begin offering securities to non-accredited investors. As a result, more investment opportunities -- especially in the real estate space -- are now available for non-accredited investors to take part in.
Examples of such opportunities include:
- Real Estate Investment Trusts (REITs)
- Real estate crowdfunding
- Peer-to-peer lending (P2P)
Groundfloor is one example of a platform that offers real estate investment opportunities to non-accredited investors. Learn more about how Groundfloor is different from other real estate investing platforms here.
Becoming an Accredited Investor: Is It Necessary?
While achieving accredited investor status isn’t necessarily essential for you to have access to investment opportunities, it can certainly be useful if you are trying to build wealth. Since accredited investors are allowed access to opportunities that can potentially be highly lucrative, gaining accreditation may be a good goal to have in mind in the future.
In August 2020, the SEC amended the “accredited investor” definition to encompass investors who meet “defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.” This means that individuals who may not meet the net worth or income requirements, but who have enough relevant experience or financial know-how, are now more easily able to qualify as accredited, and can therefore participate in more investment opportunities.
The SEC is required to review the “accredited investor” definition every four years, so more changes and adjustments to the designation could eventually occur. However, if you are just starting out on your investing journey, the best way to work toward accreditation is to take advantage of the opportunities you have available to you. As you explore different investment avenues, gain confidence in your investing abilities, and begin building wealth, you’ll be well on your way to increasing your net worth and becoming more sophisticated in the world of investing.
How to get started investing in real estate? Browse through dozens of residential real estate projects happening around the country and create your own custom portfolio of private real estate investments starting with just $10 per project with Groundfloor. Join today and start building wealth for your future.