What is a Qualified Investor vs. Accredited Investor?

by | Oct 11, 2022 | Accredited Investor, BAM Blog, Multifamily Syndication, Real Estate Investing | 0 comments

Investors fall within certain categories that determine which investment opportunities are available to them. For example, accredited investors have access to more investment opportunities because they are allowed to participate in investments that are not available to the general public.

However, not all investors are familiar with the concept of accredited investors. Here we will be discussing both accredited investors and qualified purchasers, which are two of the most common regulatory categories for investments.

While both are able to buy securities that are not registered with the US Securities and Exchange Commission (SEC), they also have their differences. We will also discuss how you can qualify for these designations so you can make the appropriate investment decisions.

What is a Qualified Investor?

Qualified investors, also known as qualified purchasers, are different from accredited investors because their status depends more on the value of their investments rather than their net worth, income, or credentials. In order to be considered qualified purchasers, individuals need to invest either $5 million for themselves or $25 million for themselves and other qualified purchasers.[1]

If an individual wants to invest through a trust, there are two scenarios in which the trust can be considered a qualified purchaser. The first one is if the trust has at least $5 million in investments, and two or more close family members own the trust. In this case, spouses, siblings, descendants, and/or their respective spouses are considered close family members.

The alternative scenario is if the trust was not formed for the specific purpose of investing in that particular fund, and its trustees are qualified purchasers. [1]

Qualified investors can invest in private investments such as 3(c)(1) funds and 3(c)(7) funds.

What is an Accredited Investor?

Many investments limit participation to accredited investors because of federal securities laws. This means companies that are offering unregistered securities need to identify accredited investors before they can allow them to participate.

As an investor, you may want to know your own status as well, especially if you wish to invest in early-stage companies, hedge funds, private placements, etc. To qualify as an accredited investor, you need to meet certain financial criteria. When the SEC amended and expanded on their definition of “accredited investor”, it allowed even more people to qualify, which means you can also secure this status using certain professional criteria.

According to the SEC, an accredited investor is an individual who has a net worth of over $1 million. The person’s primary residence needs to be excluded from the net worth calculation. This net worth test may be accomplished individually or with a spouse or partner. This means you are considered an accredited investor if you and your spouse have a joint net worth of over $1 million.[2]

Another way to determine accredited investor status is by using an income test. Any individual with an annual income of over $200,000 in each of the prior two years, and with a reasonable expectation of meeting the same income level in the current year is considered accredited.

If you wish to meet this income threshold with your spouse or spousal equivalent, you need to have a joint income of $300,000. The net worth and income tests are the two primary methods of determining accredited investor status. But this title is not just based on wealth, it is also based on financial sophistication.

Investment professionals who are holding specific licenses may be considered accredited investors as well. Investment professionals holding Series 7, Series 65, or Series 82 licenses are accredited investors. Knowledgeable employees of a private fund also qualify.[2]

Professional investment managers from an investment company, executive officers, directors, and general partners of the company selling securities are considered accredited investors.

Even entities may secure the accredited investor status by satisfying certain criteria. If an entity owns investments in excess of $5 million, they may be considered accredited. This applies to limited liability companies (LLCs), corporations, partnerships, trusts, and family offices.

If all equity owners qualify as accredited investors, then the entity is also considered accredited.

Both qualified purchasers and accredited investors are allowed to purchase securities that are not registered with the SEC. This refers to shares that are not sold on public markets and typically issued by privately held companies.

Some investments are exclusive to accredited investors. Accredited investors can invest in 3(c)(1) funds, for example. Qualified purchasers can invest in both 3(c)(1) funds and 3(c)(7) funds. [1]

How is Accredited Investor Status Verified?

If you want to know if you qualify as an accredited investor, you should check your net worth. Net worth is calculated by adding all your assets and subtracting all your liabilities including debts. Your net worth is the resulting sum.

For the accredited investor status, you must exclude your primary residence from the calculation. Mortgages and other loans on the primary residence that are normally considered liabilities are therefore excluded as well. [3]

The only time it counts as a liability is when the loan is for more than the fair market value of the primary residence. The loan amount that goes above the fair market value counts as a liability in that case.

If your net worth exceeds $1 million, individually or jointly with your spouse, then you are considered accredited. The properties do not have to be held jointly, same as how securities being purchased do not need to be acquired jointly. [3]

What most accredited investors do not realize is that there is no specific accreditation process that makes you accredited. If you meet the requirements set by the SEC, then you are automatically considered an accredited investor.

That said, if you want to invest in unregistered securities, your accredited investor status will still be verified by the company offering them. The company offering the unregistered securities has the burden of proving your accredited investor status. They are required by the SEC to do so.

An investment manager will ask you to fill in a questionnaire and submit certain requirements like brokerage statements, W-2 forms, credit reports, tax returns, and other financial documents. You can participate in that particular investment once your status has been confirmed.

You may also be asked to submit an accredited investor verification letter from a qualified financial professional such as tax attorneys, certified public accountants, registered broker dealers, and registered investment advisors.

The verification process can be tedious since you have to go through it over and over again every time you want to participate in exclusive investment opportunities. Accredited investor verification letters allow you to skip that part and save valuable time.

Do keep in mind that the letter has an expiration date. It must be dated within the last 90 days or else it will be considered invalid. But during that period, you can use this letter to participate in as many unregistered securities as you want.

Why Does the Securities and Exchange Commission Restrict Certain Investments?

Certain investments are not required to be registered with the SEC. For example, venture capital funds do not have this requirement.

These unregistered investments generally have more risk associated with them due to illiquidity. However, they can also be more rewarding. This is why a lot of accredited investors and qualified purchasers go for these types of investments.

The SEC limits access to these investment opportunities, however, in an effort to protect investors who do not have the financial sophistication or means to bear these risks. Both qualified purchasers and accredited investors have the financial safety net needed in case these investments do not work out. With their advanced knowledge and experience with regards to investments, they can also assess the risks wisely and make better financial decisions.

The Investment Company Act of 1940, signed into law by President Franklin D. Roosevelt, gave the SEC power to regulate investment trusts and investment counselors. The goal was to protect investors by regulating the organization of investment companies and the activities they engage in. The Investment Company Act also sets standards for the entire investment company industry. [1]

Having the accredited investor status gives you access to more investment options. Accredited investors can identify investments that are potentially lucrative, including the ones that are not available in the public markets and ones that are considered riskier. Accredited investors also have a high income and net worth that allows them to recover faster in case such investments do not pan out. Regular investors can ask an accredited investor or qualified purchaser for some valuable investment advice since they have a lot of experience when it comes to investing in the right securities.

Why Accredited Investors Should Consider Multifamily Syndication

Accredited investors and qualified purchasers have plenty of options when it comes to investment opportunities. Venture capitals, private placements, and hedge funds are among the most well-known choices. But for accredited investors, there is another potentially highly lucrative option in the form of real estate syndication.

Real estate syndication, particularly multifamily real estate syndication, can be one of the best investments for accredited investors who want a passive source of income. It is possibly one of the best ways to get into real estate, but it is exclusive to accredited investors.

A syndication deal can give you all the benefits of real estate investing without the usual hassles associated with owning a real estate property.

Most investors are aware of the challenges of owning real estate. If you decide to rent it out, you have to manage it, you have to deal with tenants, you have to pay for repairs and renovations, and you also have to handle emergencies on top of all that.

With a syndication deal, you don’t have to go through all of that. A real estate syndication deal involves a syndicator who puts the deal together and a group of investors who pool their resources together to purchase a single real estate property. [4]

This works best with multifamily properties for a number of reasons. One, multifamily properties are larger and have multiple units, meaning they generate a bigger, more consistent cash flow. It can be a great source of monthly income for everyone involved, thanks to its strong cash flow.

Additionally, multifamily properties are also more expensive compared to single family units, meaning they are generally more difficult to purchase for the lone investor. Real estate syndication makes it possible.

The syndicator takes on the role of general partner. They locate the real estate property, coordinate the funding, and look for accredited investors who will provide most of the capital needed to purchase it. An LLC or limited partnership (LP) is often formed for the purpose of syndication. The accredited investors become limited partners. [4]

Depending on how the deal is structured, accredited investors may get a share of the equity upon resale as well as the monthly cash flow. However, all syndication deals are different, including the way profits are split between the syndicator and investors.

With multifamily syndication, accredited investors do not have to play the role of landlord. They do not have to take any responsibility for the property because the syndicator will handle everything.

If you want to earn money from real estate but don’t want to become a landlord, this may be the best investment opportunity for you.

Multifamily syndication deals are exclusive to accredited investors. If you are interested in multifamily syndication, work with BAM Capital.

Why Invest with BAM Capital for Multifamily Real Estate Investing

It’s not easy to deal with tenants, collect rent, maintain the facilities, and deal with emergencies on top of your already busy schedule. But if you qualify as an accredited investor, then you gain access to one of the most lucrative real estate investment opportunities out there: multifamily syndication.

If you are an accredited investor looking to get started on multifamily syndication, BAM Capital is the ideal syndicator for you. BAM Capital is a world-class syndicator based in Indianapolis. It has a strong Midwest focus, prioritizing multifamily real estate that are Class A, A-, and B++. BAM Capital helps investors grow their wealth through a safe and passive real estate investment.

On behalf of their investors, BAM Capital negotiates the purchasing and financing of high quality real estate. In fact, BAM Capital is known for its award-winning multifamily investment strategy that creates forced appreciation. [5]

BAM Capital also uses a vertical integration strategy that helps mitigate investor risk. Remember that 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.

With BAM Capital, you are in good hands. The company now has over $700 million AUM and 5,931units. Accredited investors can schedule a call with BAM Capital and invest today.