History of the Accredited Investor Status

by | Mar 24, 2023 | Accredited Investor, BAM Blog, Multifamily Syndication, Real Estate Investing | 0 comments

Accredited investors are individuals or institutions who meet certain financial criteria set by the Securities and Exchange Commission (SEC) in the United States. These investors are considered to have the financial sophistication and ability to assume higher risks associated with certain types of investments.

As such, accredited investors are able to participate in exclusive investment opportunities such as private equity funds, hedge funds, venture capital funds, private real estate funds, real estate syndication deals, and certain types of private placements.

If you are an investor looking to diversify your investment portfolio, you may be interested in the investments that are only accessible to accredited investors. Here we will discuss what an accredited investor is, why this status exists, and how this designation has evolved over the years.

Who are Considered Accredited Investors?​

Being an accredited investor provides opportunities to invest in certain securities that are not available to non-accredited investors due to their higher risk and complexity. But what is an accredited investor?

Individuals or entities that meet the accredited investor rules and criteria set by the US SEC are considered accredited investors.

Under Rule 501, to be considered an accredited investor, an individual must meet one of the following criteria:

Have an annual income of at least $200,000 for the past two years (or a joint income of $300,000 for a married couple) with the expectation that you will earn that same income in the current calendar year.

Have a net worth (individually or jointly with a spouse) of at least $1 million, excluding the value of the primary residence. [1]

Be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.

Be a business entity with at least $5 million in assets.

These are the criteria for becoming an accredited investor in the US. Other countries may have different criteria for defining accredited investors.

To calculate your net worth, all you have to do is take the dollar value of all your assets and subtract all your debts and liabilities. You cannot include the value of your primary residence in the calculation of your net worth. This means you cannot include your home equity during net worth verification. [1]

If you are married and only one of you is generating income, you don’t have to meet the $300,000 threshold. You can qualify under the individual standard if your annual income is at least $200,000. [1]

You only have to meet one of these requirements to be considered an accredited investor.

Some accredited investors look for investment advisory services to help with portfolio management, asset allocation, investment selection, and risk management. The goal of these services is to help accredited investors make informed investment decisions that align with their financial goals and risk tolerance.

Accredited investors may also work with a registered investment adviser to help manage their portfolio of alternative investments or to get personalized investment advice.

What people should understand is that there is no specific accreditation process for accredited investors. Instead, it is the responsibility of the company offering unregistered securities to verify the status of their prospective investors. If you want to participate in these exclusive opportunities such as investment funds and syndication deals, you may have to present some financial documents to prove that you qualify under one or more of the criteria set by the SEC.

History of the Accredited Investor Status

For years, the SEC held the challenging task of protecting investors in private offerings and securities while supporting the growth of young companies and startups. Even during the early 1930s, federal government regulators already struggled with finding the right balance. This eventually led to the SEC’s creation of the term “accredited investor”. [2]

This concept was developed to protect investors who did not have the resources or experience to properly evaluate private securities offerings. On the other hand, accredited investors are considered financially sophisticated and therefore have the means to participate in these private offerings even without full protection from state or federal securities laws.

Initially, Regulation D of the Securities Act of 1933 defined accredited investors as individuals that have reached a certain level of net worth or income.

However, in 2010, President Obama made an important amendment to this definition by signing the Dodd-Frank Wall Street Reform and Consumer Protection Act. This amendment is what now prevents the value of an investor’s primary residence from being included in their net worth. [2]

Accredited Investor Definition Modernized by the Securities and Exchange Commission​

In 2020, the SEC further modernized the definition of an accredited investor through additional amendments. These amendments allowed certain individuals to participate in exclusive investment opportunities even if they did not meet the financial criteria as long as they had significant knowledge and expertise in those private markets. [3]

As long as individuals meet the established measures of financial sophistication, they can participate in private capital markets, according to the SEC.

The expanded definition now includes tribal governments, entities, and other organizations that can establish their financial sophistication. According to the SEC, the amendments are part of their ongoing effort to simplify, improve, and harmonize the exempt offering framework. Their goal was to keep protecting investors while expanding investment opportunities. [3]

SEC’s amendments revised Rule 501(a), Rule 215, and Rule 144A of the Securities Act. They added a new category that accommodates investors with professional certifications, credentials, and designations issued by an accredited educational institution.

Therefore, investors who hold Series 7, Series 65, and Series 82 licenses and are in good standing are considered accredited investors. This means some people qualify as accredited investors based on their credentials rather than their net worth. [3]

Also classified as accredited investors are natural persons who are considered knowledgeable employees of a private fund.

The amendment even adds a brand new category for entities organized under the laws of foreign countries that own “investments” in excess of $5 million. These entities are not considered accredited if they were only formed for the sole purpose of investing in the securities offered. [3]

Similarly, family offices that have $5 million in assets under management are considered accredited investors.

Finally, the amendments also added the term “spousal equivalent” to the definition of accredited investor. This allows spousal equivalents to qualify as accredited by pooling their finances together.

Why Did the Government Create the Accredited Investor Title?

The concept of “accredited investors” came from The Securities Act of 1933. It came from the government’s decision to keep novice investors away from investments that they did not have sufficient knowledge or experience to evaluate properly.

When it comes to investments, it is very important to have the ability to assess the risks and merits of a specific security. Knowledgeable investors are able to make smarter investment decisions based on their financial means and goals. Unfortunately, uneducated investors tend to produce poor outcomes. [1]

Investors who meet the accredited investor criteria are presumed to have the knowledge and resources to evaluate and bear the risks associated with these types of investments. By limiting access to these investments to accredited investors, the SEC aims to reduce the potential harm that could result from unsophisticated investors making high-risk investments that they don’t fully understand.

Accredited investors are considered knowledgeable and financially sophisticated investors due to their net worth, annual income, and credentials. They have enough investing experience to make the right decisions. Plus, they have a financial safety net that will protect them in case an investment does not work out.

The government created the accredited investor title as a way to protect individual investors who may not have the financial knowledge or resources to fully understand the risks associated with certain types of investments. The Securities and Exchange Commission (SEC) has established these rules to ensure that investors are protected.

Work with BAM Capital for Multifamily Syndication

One example of an investment opportunity that is exclusive to accredited investors is real estate syndication.

A real estate syndication deal is a type of investment wherein a group of investors pool their capital in order to purchase a single real estate property. This can be done with any type of real estate, but multifamily properties like apartment complexes are the most popular among investors. This is because multifamily properties are usually hard to obtain if you are a lone investor and they tend to generate a strong and consistent cash flow due to the number of units available to renters. [4]

A real estate syndication deal is put together by a sponsor or a syndicator who initiates the deal and looks for investors who will provide the capital needed to purchase the property. This is a passive source of income for investors because the sponsor will take care of everything including property management. They will make sure the property is profitable.

Depending on the deal structure, the syndicator and the passive investors will split the monthly cash flow and appreciation on resale.

Multifamily syndication offers plenty of benefits for investors. It’s a passive investment, plus it’s a good way to diversify your investment portfolio. There’s also a significantly lower risk compared to purchasing a large multifamily property all on your own.

If you are an accredited investor looking to participate in a multifamily syndication deal, you need to work with a trustworthy syndicator.

BAM Capital has more than enough experience when it comes to acquiring and managing multifamily properties in the Midwest. This Indianapolis-based syndicator focuses on Class A, A-, and B++ multifamily properties that have a proven upside potential and in-place cash flow.

BAM Capital is known among investors for its consistent track record and ability to guide you through every step of the syndication deal. Being vertically-integrated allows them to handle everything from negotiating the purchasing to managing the multifamily syndication property. [5]

BAM Capital even has its own property management team and construction team that handles renovations. Its award-winning investment strategy allows BAM Capital to create forced appreciation. This syndicator mitigates investor risk while helping them grow their wealth.

BAM Capital now has over $700 million AUM and 5,000+ units, making it one of the most reliable syndicators for accredited investors. [5]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.