Can an LLC be an Accredited Investor?

by | Aug 15, 2022 | Accredited Investor, BAM Blog, Multifamily Syndication, Real Estate Investing | 0 comments

The definition of accredited investors was adjusted by the US Securities and Exchange Commission (SEC), allowing more investors to qualify for this designation. Becoming an accredited investor comes with several benefits, including being able to participate in exclusive investment opportunities such as private funds.

With the expanded definition, more people can now qualify as an accredited investor. This means more individuals can join exclusive securities offerings. But you may be wondering if the title “accredited investor” can also apply to entities like limited liability companies (LLC). This is what we are discussing today.

Accredited investors are able to invest in high-yield private ventures because of factors including their net worth and annual income. This is because the SEC limits these opportunities in order to protect less experienced investors and those who do not have the financial safety net necessary for these higher-risk ventures. [1]

When the SEC expanded the definition of accredited investors, it opened the doors for more people to invest in securities beyond the traditional public stocks and bonds. This gave investors more opportunities to diversify their investment portfolio, granted that they have the qualifications and meet the requirements to be accredited. Now the SEC does not just look at a person’s net worth and income, but also their level of financial sophistication.

Who is Considered an Accredited Investor According to the Securities and Exchange Commission?​

The term “accredited investor” may apply to individuals and business entities alike, as long as they fit the definition set by the SEC.

Accredited investors get access to exclusive investment vehicles and securities by simply satisfying at least one of the set requirements: income, net worth, asset size, or professional certifications. [1]

An accredited investor has access to these riskier ventures because they are seen as having financial sophistication and sufficient investment experience. Thanks to their net worth and income, they do not need the protection provided by the liquidity of public securities markets.

A lot of the investment opportunities that are limited to accredited investors are illiquid, meaning they cannot access these funds for years at a time.

According to the SEC, an accredited investor is a natural person with an annual income of $200,000 or $300,000 joint income with a spouse.[1] The SEC amended this to include “spousal equivalent” when determining joint net worth or joint income. This annual income threshold must be met for at least two years, with a reasonable expectation of the same amount for the current year. [1]

A net worth test can also be used to determine the accredited investor designation. Anyone with a net worth over $1 million either by themselves or with a spouse or spousal equivalent is an accredited investor. [1] Take note that the person’s primary residence should be excluded from the net worth calculation.

High net worth individuals (HNWIs) are considered accredited investors because of their status. Banks, insurance companies, trusts, brokers, and certain individuals with professional knowledge may be classified as accredited investors. [2]

While these are two of the most well-known requirements for being an accredited investor, the SEC has included more categories into their definition.

Any entity in which all of the equity owners are accredited investors is also accredited. The same goes for any trust with assets that exceed $5 million in total. However, the trust or entity must not be formed for the specific purpose of purchasing securities. [1]

Additionally, individuals with certain professional qualifications may also be considered accredited investors. Anyone who holds a Series 7 (general securities representative license), Series 65 (uniform investment adviser law license), or Series 82 (private securities offerings representative license) license in good standing from the Financial Industry Regulatory Authority (FINRA) is considered an accredited investor by the SEC, subject to state rules that may be applicable to them.[1] This means a licensed investment adviser representative may be an accredited investor even if they do not meet the net worth and income requirements.

Can a Limited Liability Corporation be an Accredited Investor?

Because the SEC amended their definition in August 2020, LLCs can now officially qualify as accredited investors.[3] Even if individual owners within the LLC do not fit the criteria, the LLC itself may qualify if it meets certain criteria.

The LLC should have over $5 million in total assets. It also should not be specifically formed for the purpose of buying shares in the particular offering that they are interested in. [3]

If an LLC fits these qualifications, it is considered an accredited investor even if it is composed of non-accredited investors. The LLC simply needs to be registered as the holder of the shares in the investment.

How to Calculate Your Net Worth

Determining whether or not you qualify as an accredited investor is one of the reasons you may want to calculate your net worth. Your net worth is a good calculation of your financial health. This is the reason why exclusive investment opportunities are only accessible to those with a high enough net worth. Having a high net worth indicates wealth, but not only that, it indicates that the person can handle the risks associated with these alternative investment ventures.

You can calculate your net worth by adding all your assets and then subtracting your liabilities. When calculating for accredited investor status, you have to exclude your primary residence from the equation. [1]

Assets are everything you own. This includes all your money, your real estate equity besides your primary residence, your savings, your investment plans, and other items with clear market value such as jewelry, clothes, vehicles, art, etc. [2]

Your liabilities include outstanding debts such as the remaining balance on your home, car, or personal loan. This also includes business loans, student loans, credit card debt, back taxes, and other things you still owe.

As you pay off your debt, you may notice your net worth starting to grow. It will also grow naturally if your salary increases. If you are saving up for retirement, you may also want to keep track of your net worth.

With the amended accredited investor definition, the SEC now allows “cohabitants occupying a relationship generally equivalent to that of a spouse” when calculating joint net worth. [1]

Benefits of Being an Accredited Investor

Of course, the reason we are trying to determine whether or not you fit the accredited investor definition established by the SEC is so that you can enjoy all the benefits of being one. Accredited investors have access to investment opportunities that are not available to others. They can potentially earn more than investors who can only access public assets.

With their net worth and annual income, accredited investors are less concerned about the potential risks of certain investments like hedge funds and private funds. They have a financial safety net that can protect them in case an investment does not work out.

Accredited investors are also knowledgeable about investments and can therefore assess the risk properly.

Accredited investments have certain exemptions to federal securities laws. For example, accredited investments do not have to be registered with the SEC under rules 505 and 506 of Regulation D, but only if they are sold to accredited investors. [4]

Being an accredited investor is worth it because you get to access things like hedge funds, venture capital, private funds, real estate syndication, etc. While some of these are considered riskier than your traditional investment vehicles due to illiquidity, they also have the potential to generate much greater returns. Accredited investments can be associated with higher yields.

Accredited investors also have the ability to diversify their portfolio easily because of their access to more investment opportunities. Public markets are limited when it comes to diversification. With the accredited investor status, you can find more alternative investment vehicles.

How to Become an Accredited Investor

Despite the strict requirements, there is no official accreditation process for individual investors, LLCs, and other entities that determines accredited investor status. There is actually no independent body or agency that reviews the credentials of investors who want to look into these private placements.

The burden of having to prove that someone qualifies as an accredited investor falls on the investment vehicle or the company offering the securities. They will often ask for the investor’s financial statements, tax returns, and other requirements that prove their net worth or annual income. Knowledgeable employees with certain professional certifications may just present their license or similar documents.

This screening process is done by investment managers. Accredited investors have to go through this process of filling up a form and submitting their financial statements for every investment they want to participate in.

Investment Opportunity for Accredited Investors: What is Multifamily Syndication?

While many accredited investors go for venture capital and hedge funds, those with sufficient knowledge invest in real estate. Real estate can be a lucrative investment and there are many ways to invest in it. But the general consensus is that taking care of a property yourself is too time-consuming and requires a lot of personal involvement.

Accredited investors have access to a passive real estate investment through syndication deals. If you want to get into real estate investing without the hassle of taking care of a real estate property yourself, real estate syndication is the best way to do it.

A real estate syndication deal is when multiple investors pool their resources together to purchase a single property. [5]

Multifamily properties are perfect for syndication for a lot of reasons. These real estate properties are large and have many units, meaning they can generate consistent amounts of income and not have to worry about vacancies. Examples are condominiums, duplexes, triplexes, and apartment complexes. Even if one or two units become vacant, the remaining units can still generate income through monthly rent while you wait for new tenants.

These properties can produce a strong cash flow, but they are generally too expensive for a lone investor to buy. This is where syndication comes in.

With syndication, investors can participate in real estate deals that they normally would not be able to. Accredited investors can participate in real estate investing without having to spend as much money. [5]

There is also much less work involved for the participating investors. The syndicator does most of the hard work. They put the deal together, locate the real estate property, coordinate the funding, and look for accredited investors who will participate. Keep in mind that most real estate syndication deals are exclusive to accredited investors.

Accredited investors provide most of the capital needed to purchase the property. They often get equity upon resale of the property, depending on the deal structure. They also get a share of the cash flow, meaning they get to enjoy a true passive investment. [5]

Investors don’t even have to worry about managing the property. Unlike your traditional real estate investments, you do not have to play the role of landlord when you participate in a syndication deal. Either the syndicator will hire a third party property management team or they will handle it themselves. Regardless, it will not be your responsibility. You will not have to collect rent, manage the property, deal with tenants, handle emergencies, maintain the facilities, etc.

An LLC or limited partnership (LP) may be formed for the purposes of the multifamily syndication deal. [5]

Multifamily syndication is one of the best sources of passive income for accredited investors. Diversify your portfolio and get into real estate investing without the headaches associated with it.

Why Invest with BAM Capital for Multifamily Real Estate Investing​

Work with BAM Capital for multifamily syndication if you are an accredited investor interested in real estate investing.

BAM Capital is an Indianapolis-based syndicator that helps accredited investors grow their wealth through multifamily syndication. BAM Capital prioritizes Class A, A-, and B++ multifamily real estate properties and has a strong Midwest focus. Its award-winning multifamily investment strategy creates forced appreciation while mitigating investor risk. BAM Capital is known for its vertical integration strategy and consistent track record. [6]

Accredited investors who want to enjoy a safe and passive real estate investment should work with BAM Capital.

BAM Capital negotiates the purchasing and financing of high quality multifamily properties on behalf of passive investors. BAM Capital currently has over $700 million AUM and 5,000+ units. [6]

No investment is without risk. Make sure to consult your investment advisor and speak to a BAM Capital investment team member before making any financial decisions. Accredited investors can schedule a call with BAM Capital and invest today.