Investing in commercial real estate the requirement of accredited investor status shows up. What does the accredited investor status mean? We will discuss this term in our article.
The status of Accredited investor is required for the majority of larger real estate deals. The status of accredited investor is mostly required for participation in privately placed deals. Many of crowdfunded deals as well require the active status.
So, what is an accredited investor?
An accredited investor is a status given to a person or entity that can satisfy one of the requirements regarding annual income, net worth, governance status, or professional experience and knowledge. The SEC requires this status of investors wanting to participate in deals that are not registered with financial authorities. Deals not registered with financial authorities are the deals sourced through private placements.
Until May 16, 2016 accredited investor status was also required by the crowdfunding platforms, but today anyone can invest in real estate through crowdfunds. REITs historically do not require accredited investor status to buy shares. The main reason behind the requirement is the protection of those individuals who might be unable to sustain economic risks linked to dealing with unregistered securities.
By the SEC’s definition, any individual investor who meets one of the below requirements can be considered an accredited investor.
* Demonstrate an annual income of $200,000, or $300,000 for joint income with a spouse, during the last 2 years with an expectation of stability or growth of income in the future. If the income is reported jointly with a spouse, then the level of income must have exceeded the minimum threshold for the previous 3 years.
* Net worth exceeds $1 million, either individually or together with a spouse.
* An individual performs the role of general partner, executive officer, director or similar in a company that issues unregistered securities.
* A private business development company with registered asset value of above $5 million. This business may not have been formed with the sole purpose of purchasing specific securities.
* If all equity owners of a company are accredited investors, then this entity is considered an accredited investor.
* Since 2016 an accredited investor can be a registered broker or investment advisor as well as any individual who can demonstrate sufficient education or job experience in a field that would confirm his professional knowledge of unregistered securities.
Inability to confirm an accredited investor status often might block you from lucrative opportunities. However, as the real estate market becomes more accessible there are plenty ways to invest without being an accredited investor.