How To Become An Accredited Investor (and KILL IT)

What is an accredited investor? How do you become an accredited investor? Why should you become an accredited investor and what are the benefits of being so? 

So today, we're talking about all things being accredited investors. So by the end of this blog, you should be a pro at the important details surrounding the securities and exchange commissions, and designation of accredited investor status. 

For those of you who don't know me, my name is Nic DeAngelo with Saint Investment Group. We currently have over $150 million in real estate assets under management and we're also currently raising an additional 100 million from investors. As a reminder, I'm not an attorney, I'm not a securities attorney. I'm not an accountant and I'm not a CFP, etc. So I definitely recommend you talk with your professionals who best understand your situation for making any major financial decisions. 

Everything in this article is my understanding from my research and my personal experience. 

So I get the question all the time of what is an accredited investor, especially from people interested in investing in the Saint investment income fund or from viewers of our videos, and simply put 100% of investment companies are bound by the rules and regulations of the securities and exchange commission. 

As far as many funds are concerned, they're limited to legally only accepting accredited investors later on in the video. I'll jump in and explain our personal experience and how our process works to give you a real-life example. So let's get into defining what exactly an accredited investor is. An accredited investor is a status that is defined by the SEC  and can be either an individual or an entity that can be considered an accredited investor. Let's start with the requirements for individuals because that's probably why you're here to be an accredited investor. You must be one. So either of the following criteria, one criterion is based on your income, and the other criteria is based on your net worth and again, you only need one to be considered accredited. 

First, let's talk about the income route to qualify as an accredited investor for your income alone. You must have an earned income of $200,000 per year or more for the last two years and the expectation that should continue in the future.

Also, if you're married, you can qualify. If you have a $300,000 household income or higher that's an option one going the income route. 

Option two is the net income route to be an accredited investor using your net worth alone. You must have a net worth of $1 million or more, but here's a big catch. That's excluding your primary residence because, for many Americans, their primary residents are one of the biggest boosters to their net worth overall. 

For many Americans, their home is the biggest asset they will ever buy in their lifetime. So, the SEC was very clear in the calculation for the $1 million net worth, and that can be for an individual or a married couple, but for that calculation of $1 million, you cannot include your personal residence. 

I'm gonna give you an amazing way to remember the SEC's accredited investor definition. We'll call this the 1,2,3. 

  • 1= equals a $1 million net worth or higher excluding your primary residence. 
  • 2=  $200,000 earned income or higher as an individual. 
  • 3=  $300,000 or more as a married couple. 

So that's the 1, 2, and 3 of accredited investor status. 

So, that's how you qualify as a natural-born human. But what if you wanna invest as an entity? 

We see this commonly with high net worth and very financially sophisticated individuals that wanna use different entities, either for tax reasons or for asset protection or some other reason, because there's very advanced and they have a whole team of people that develop these strategies. But dive into the definition of what the SEC considers an accredited investor entity. 

An entity can be considered an accredited investor. If it meets one of the following two criteria: 

  • Criteria number one is if all equity partners and all owners of that entity are themselves, accredited investors. 

I mean, that makes sense, right? If everybody who makes up the entity is already accredited, then the risk to a nonaccredited investor is zero because no one there is a non-accredited right?

So if a hundred percent of the entity's ownership, individuals are accredited, the entity, therefore inherits that accreditation status. 

  • Criteria number two is if that option number two is if that entity has $5 million in assets or greater if either of these qualifications is met.

The SEC  blesses that entity as an accredited investor, and those entities can then invest in different accredited investors, only syndications funds and different opportunities. 

So now we know what exactly an accredited investor is defined as, so what's the purpose of the accredited investor status anyway? 

Well, interestingly enough, the SEC came up with its definition of the accredited investor in the wake of the great depression in a law known as the truth insecurities law, essentially this act improved financial disclosure requirements so that investors are informed as much as they can be about the investments they are about to make. It also tightens rules, prohibiting fraud, and any type of misrepresentation in the sale of securities. 

This is good. This is a time when the government stepped in and effectively made laws to protect investors who are getting burned in the wake of massive economic disruption. The SEC goes on to state its goals with these laws saying that these laws are to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering, unnecessary, the protections that come from a registered offering. 

That sounds really complicated. But essentially the key takeaways here are that the SEC believes that individuals that have higher income  and  higher net worth are more likely to be financially sophisticated and they're also more likely to withstand a full financial loss. If that investment did not work out, whether or not these assumptions are true is a case-by-case situation. Obviously, the SEC feels confident that their definition will protect investors as a whole. 

So how exactly do you become an accredited investor? Well, sadly there's no formal government certification offered to prove that you are an accredited investor. The SEC does not send you some kind of plaque or diploma that says, congratulations, you're an accredited investor and then you can hang it up on your wall. There's also no government database or directory where you can just look up who's accredited and who's not accredited. Instead, companies selling securities are required to confirm potential investors, accredited status on their own. The investment company must take the steps on their own to verify you as a credited investor and must take the responsibility as well on their shoulders for this reason. 

Most typically you'll see different investment companies, whether that's funds, syndication, JV partnerships, etc. These companies will essentially hire out this accreditation verification process to an outside third party that is independent. This independent third party will then review all the details and provide a letter to you, the investor, or to the investment manager, like the funder syndication saying that you are an accredited investor and therefore are able to invest in the offering. If you're curious, the largest company you'll see doing this is called verifyinvestor.com. We use them, many people use them. It's very efficient in a quality process.  It's very efficient in a very smooth process. We personally use them for the same income funds, and it's a very streamlined professional process that gets done very quickly. 

While early on, I thought this process might be difficult and turn investors off. The reality is it actually benefits everybody involved in the situation, the investment company benefits because they use an independent third party to verify the accredited investor. So they have proof that they made very professional efforts to verify that individual as an accredited investor, in addition to a letter, certifying them as accredited from the third party, and most importantly, this process benefits the investor. 

Going through this process with a professional third party allows the investor to be confident that they meet the criteria and that the risk to them is low enough that a government agency is blessing them. Being able to invest in an accredited investor opportunity. This process will likely mean you need to release some financial statements to a third party. 

Often, including W2 S tax returns, bank statements, brokerage accounts, etc. Essentially, you can't just say, Hey, I have the income or, Hey, I have the network. This third party needs to verify that physically, by looking at the documents. Luckily this process goes quick. You get your letter, you submit it to the fund, and boom, you are accredited and you are ready to invest. 

So why work to become an accredited investor? What are the benefits to going through it all? 

Because the SEC limits tightly who can invest in certain offerings. You literally cannot legally invest in certain offering types, unless you are accredited. The fund managers can have massive repercussions and gigantic fines from the SEC, if they don't comply with the accredited investor rules. Due to this investment companies, often don't take chances and typically leave the best opportunities for accredited investors only. That means if you're an accredited investor, you have access to many more options for your investments and also the cream of the crop investment opportunities with that wider pool of investment options. 

You'll see funds that have the opportunity to earn much more than you'll see and then non-accredited investor opportunities. I'll give you a firsthand example here of sophisticated individuals reaching out to us to invest in the Saint income fund and when we do open up the fund to new investors. 

We have to discuss with each and every new investor, what their accredited investor status is. Most investors have zero idea about any of the criteria related to being an accredited investor. We're always happy to walk them through step by step, what qualifications they need to have. But the problem is that sadly, while we're discussing with many people, we find out that they are not accredited, no matter how smart, sophisticated, or great they are without them being accredited, we can't let them into the Saint income fund. Literally, we are not legally allowed to. 

Think about that. We have one of the simplest, most conservative, effective, and flexible fund models available that we've seen on the market. That's also 100% backed by real estate assets. Instead of things like equities, like a volatile stock market or bonds or anything else that can be very volatile in recent years and sadly, we still have to tell these individuals that we can't accept their investment. 

Additionally, many of these investors could benefit the most from having an additional stream of income that we offer in an income fund. Otherwise, their cash is gonna be sitting in bank accounts, losing a ton of value to inflation, or sitting in brokerage accounts where their life savings are at risk for all kinds of market ups and downs and other issues that we've seen so much in recent years. Even if we know we could benefit them so much, but compliance is obviously 100% mandatory at Saint. So we can't break the rules a single time. 

To drill down further on the rules. The Saint income fund is what's called a 506C fund offering. This means we can openly discuss, market, and talk about all details of our fund with the general population, which is not what all funds can do by the way. So that's unique to this 506C structure. But there's a big trade-off. We can only accept accredited investors by the 506C definition. 

All in all, being an accredited investor is a huge advantage. If you were looking to take your investment opportunities to a whole new level, it does have some big requirements. 

Let's go back over the 1, 2, and 3 requirements we learned earlier. A 1 million in net worth excluding your primary residents or $200,000 income as an individual or $300,000 in income as a married couple while only 4% of the US population meets the income requirements for an accredited investor status. 

It is possible and if you are an accredited investor reading this article and you're interested in learning more about the Saint income fund, check us out saintinvestment.com. We have tons of information there, and you could always give us a call and we can answer questions as well. 

Regardless of your network, be vigilant about your investment opportunities. Always do your own due diligence, know how liquid your investment will be, and always remember to ask the tough questions when you're looking at any investment opportunity, can you afford to lose that money? And then on the flip side, can you afford to miss great investment opportunities? You have to balance both of these in all of your investment decisions. 

All right, that wraps up everything we're gonna cover on accredited investor status. So see you next time and stay hungry.

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