I first came across the term accredited investor when I was researching investment opportunities that I could participate in that were outside of the stock market. Initially, I thought this was some sort of certification that an investor had to get to invest in these exclusive deals. After a quick google search, what I learned was quite different from what I originally thought.

What is an Accredited Investor?

The SEC (Securities And Exchange Commission) defines an accredited investor as someone whose income has been at least $200k a year ($300k for joint income) for each of the last two years and expects to have the same income the coming year. If this criteria isn’t met, the second option is to have a net worth of at least $1M, excluding a primary residence regardless of income.

Qualifying as an accredited investor doesn’t mean that you will get some certificate; it is actually a lot simpler. In some cases, you are only required to self-qualify, and in other cases, you are required to send a letter of verification from your CPA, or they may ask you to provide your tax returns as proof of income.

Why does this exist?

This classification was created by the SEC as a measure to protect beginner investors from getting into riskier investments and not being able to weather the loss of their funds.

The benefit of being an accredited investor is that you have access to different types of investments in various asset classes. For example, you can find investments in oil, pre-IPOs, and multifamily syndications.

This might sound like an exclusive club for high net worth individuals where they have access to deals that the average investor doesn’t know about, but the government made some changes to include more investors.

What is a Sophisticated Investor?

In 2016 the government passed Title III of the Jobs Act, which opened up some of these investment opportunities to non-accredited investors under certain conditions. What this means is that some investments can accept non-accredited investors, but the investor needs to have sufficient experience and knowledge to be able to evaluate the risks of the investment. This classification is known as a sophisticated investor.

Next steps

Being an accredited investor offers more deals, but this shouldn’t stop non-accredited investors from getting educated and building relationships to become sophisticated investors.  Both accredited, and sophisticated investors must do their own research into investment opportunities to figure out the right next step.

You will find operators who work with both accredited and sophisticated investors in the multifamily syndication space.  Some operators only accept accredited investors since taking in sophisticated investors has several compliance restrictions.

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