After browsing 1031Crowdfunding.com you may see that many of the investments we offer are intended for accredited investors. So you ask yourself, what is an accredited investor? Am I an accredited investor? Why do I need to be an accredited investor?
We’d like to take this opportunity to explain.
What is an Accredited Investor
Accredited Investor is defined by the Securities Exchange Commission (“SEC”) in Rule 501 of Regulation D of the Securities Act of 1933. The term accredited investor is used to describe investors who have the financial ability to absorb losses.
An individual investor meets the primary requirements to qualify as an accredited investor if he or she:
Earns an individual income of more than $200,000 per year, or $300,000 of joint income for the last two years and expects to reasonably maintain the same level of income, or has a net worth (not including the value of their primary residence) exceeding $1 million, either individually or jointly with his or her spouse. Investors who meet these requirements are typically also considered sophisticated, meaning they have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. Rule 501 additionally provides requirements for companies, organizations, trusts, and other entities to qualify as accredited investors.
The SEC created the category of accredited investor as a way to exempt certain companies from the requirement to register the securities they sell. Registration of securities with the SEC is a regulation put in place as a way to protect investors; however, requirements associated with the registration of securities can often become a financial burden for some companies. Therefore, the SEC provides a number of exemptions to allow companies the opportunity to sell unregistered securities. One common requirement for each of the possible exemptions is that the securities may only be sold to accredited investors. It’s presumed that investors who meet these qualifications do not need the SEC to protect them from the risks of investing and can evaluate investments on their own.
Private equity funds, hedge funds, venture capital firms and others are among the investment vehicles that sell unregistered, or private, securities to accredited investors. These private funds determine what information they wish to include in a prospectus to describe the investment to prospective investors. Therefore, the accredited investor undertakes the due diligence burden to determine the merits of the investment. With investment experience, the accredited investor should be able to properly scrutinize the investment materials, and in the event a poor investment decision is made, the accredited investor has the financial means to absorb possible losses. Furthermore, these types of private securities may have liquidity restrictions on them; such securities may not be able to be sold for a period of time. Accredited investors have more financial protection than general investors and can afford to have a portion of their assets locked in an illiquid investment.
Limiting the sales of certain securities to only accredited investors is a way that the SEC continues to protect investors from fraudulent or overly risky investment funds and is also a way of protecting investors from themselves. As sure as an investment may seem and as great as a track record a company may have, all investments have risk. With accredited investor requirements, investors are prevented from investing beyond their means.