What's an accredited investor? What if I’m Not?
Another question is why does it matter? Well, the good thing is that it’s really not all that complicated. You just need to know some of the basics, and you’ll be able to invest with confidence knowing that you and your investment sponsor are in compliance.
First, a few facts:
Real estate interests are typically held in a company, such as an LLP or LLC
Rights to ownership in these companies are referred to as equity
Equities are a type of security regulated by federal securities laws (the SEC)
Any company offering securities must either register their offerings with the SEC or find an exemption from the registration requirements
The vast majority of real estate equities are offered under exemption status, specifically Regulation D of the Securities Act of 1933, commonly referred to as exemptions. This rule allows any company to offer securities to its investors without having to register with the SEC, but they must meet a handful of requirements, depending on the exemption. A couple requirements restrict the offering to accredited investors, either partially or wholly.
An individual investor is accredited if either:
They have an individual net worth, or joint net worth with their spouse, of $1MM. This does not include either the assets or the liabilities associated with their primary residence.
OR
They have an individual income of $200k, or a combined income of $300k with their spouse, for each of the last 2 years, and have a reasonable expectation of exceeding the same within the current year.
If you are not an accredited investor, you may still invest in securities. However, you need to know what you’re doing. Your sponsor will verify your investing sophistication as well as restrict available offerings to you in order to maintain exemption status.
Why doesn’t the company just register with the SEC?
Excellent question. Many companies do, however in real estate there are reasons not to. Registration is expensive and takes time - two factors that kill deals. Remember those companies we were talking about, the LLC’s and LLP’s? These companies are often single purpose entities, or SPE’s, holding a single property and existing for the sole purpose of defining the ownership of that property. Each SPE would need to be registered as a security, which could reasonably delay the purchase closing or dilute returns.