Updated: Nov 5, 2018
When you start learning about commercial investing and syndication, the term “accredited investor” may come up. What does that mean, and why should we care? When you are investing in a commercial real estate syndication deal, you are actually buying a security, a part of the LLC (Limited Liability Company) that owns and manages the asset. As an investor, you own a portion (shares) in that LLC. An accredited investor is a person that can deal with securities not registered with financial authorities by satisfying one of the income, net worth, or professional experience requirements.
The SEC (Security Exchanges Commission) requires a registration process from syndicators. Syndicators can avoid this expensive and arduous process by offering these opportunities to only accredited investors. The government believes accredited investors are capable of accepting any potential risk from an unregistered security. As with any investment, deal structures and returns can be complex. Investors must be educated on what and with whom they are investing in.
Am I an Accredited Investor?
This is a question that I get often.
In Part 506 of Regulation D, the SEC defines an Accredited Investor as someone who has:
· Made at least $200,000 of annual income in the previous two years, or $300,000 for a married couple.
· Has a net worth in excess of $1,000,000, (excluding the value of your primary residence).
Many Passive Real Estate Syndication deals require investors to be accredited. However, there are some 506b opportunities that allow for a small number of Sophisticated Investors.
A sophisticated investor has investing and financial knowledge and experience to evaluate the risks of a prospective investment.
Opportunities for sophisticated investors do exist, but they are typically more difficult to find. In order to find these opportunities, you need to know syndicators who offer them, since they cannot be advertised. The law also requires that the syndicators need to have a relationship with investors, so this is key to accessing these great passive deals.
A More Detailed Breakdown of 506c vs 506b
Real Estate Syndication deals are filed as either 506b or 506c by the Federal tax code. Deals under 506c can be publicly advertised and investors must prove that they are accredited investors. Proof is often submitted through a 3rd party business and requires paperwork, tax returns etc.
A deal that is filed under a 506b cannot be publicly advertised, and sponsors can only offer deals to investors that they have a relationship with. In a 506b deal, there is no “proving” required, per say. Instead, it is the “honor code”, where investors self discloses on the private placement memorandum (PMM). They simply check a box if they are an accredited investor, or an unaccredited investor.
Currently, all of our deal opportunities are 506b and not advertised, only accessible to our friends, family, and colleagues . Not accredited, no worries! There are times we have opportunities that we can offer to our unaccredited friends.
If you have questions about being an accredited investor, or want to discuss any real estate topic, visit www.newheightsinvestmentgroup.com and join the mailing list so you never miss an update.
If you are ready to start building long term wealth AND creating passive income, and want to learn about our current deal pipeline, let’s chat.