So you’re looking to passively invest in Real Estate by investing in a fund or working directly with a Real Estate Investment company. But you’re unsure if you’re considered an “Accredited’ or “Sophisticated” Investor. Defining a “sophisticated or accredited investor” has been a question asked by many. So, exactly what does it take to be considered a “sophisticated or “accredited” investor? Understanding this will clarify the kind of investment you may or may not be qualified to participate in. Please, keep in mind that these definitions are US Government definitions – we think you’re very sophisticated.
Prepare your mind for government definitions and interpretations starting…now:
Investment opportunities that the Morgan Investment Group offers are not registered with the Securities and Exchange Commission (“SEC”) but are filed with the SEC under Regulation D. When any investment is unregistered the offering entity is required to offer to and accept only those investors who are considered “sophisticated” or “accredited”, as those terms are defined by the SEC and related regulatory interpretations. The reason is simple. Offerings not registered with the SEC are considered unregulated. The specific terms of each investment are not reviewed or approved by any government regulatory agency. Therefore, they present more risk to investors. The SEC considers these higher risk, unregulated investment opportunities to be “safe” only for investors who are either “sophisticated” or “accredited”.
There are some exceptions under SEC regulations. Certain investments are considered “exempt” from registration when filed under Rule 506 of SEC Regulation D (“Reg D”). Reg D is considered a “safe harbor” within typical SEC requirements. It provides objective standards a company can rely on to qualify its “exempt” status. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of “accredited” investors.
Reg D Rule 506 exemptions were created to make it easier for businesses to raise investment capital. Limitations within Reg D are generally related to the extent to which the offering entity can advertise, publicly market, or solicit investors. However, removing the onerous registration requirements can be an enormous benefit to companies seeking an infusion of capital.
So what about the little guys? How can they still invest? Rule 506(b) goes further and permits up to 35 unaccredited investors to participate in investments filed under this Rule. This is a common way to participate when you are not independently “accredited”. MIG often structures its investment products so that individuals become part of a limited liability company that is accredited through its other member investors.
“Accredited” is a term specifically defined by the SEC. An “accredited investor” is someone who is deemed to have sufficient income, net worth, asset size or professional experience in investing, indicating that they can bear the risk of an unregistered and therefore unregulated investment. Typical requirements to be “accredited” are:
- Annual income exceeding $200,000 in each of the two most recent years.
- A net worth exceeding $1,000,000.
- Being an investment professional or an investment advisor themselves.
- Being part of an entity that meets the above requirements*.
A “sophisticated” investor, less defined, is generally someone who has a high net worth, vast knowledge of markets and financial matters and substantial experience in making investments of high-risk.
While “accredited” and “sophisticated” are terms that are often used interchangeably the investment sponsor should be careful to ask the right questions of its potential investors to ensure compliance with these standards. From the perspective of a company offering an investment that is exempt and, accordingly, considered higher risk, it is wise to require investors to submit financial statements and other documents that evidence their status as a qualified “accredited” or “sophisticated” investor.
So there you have it. You now know enough to participate in Real Estate Investing funds either by fitting the description of a “Sophisticated Investor”, “Accredited Investor”, or by taking part in an LLC of 35 or fewer members that together form an accredited investor entity.
Looking to take the next step? We’ve been doing all the talking and want to hear from you. Reach out so we can find the right investment that fits your goals.