accredited investor definition is the focus of this guide for passive real estate investors. First, it highlights the main idea behind the topic. It also outlines the risks and questions worth reviewing. As a result, you can approach the discussion with a clearer framework.
What to know about accredited investor definition
Core ideas for accredited investor definition
In August 2020, the SEC proposed a new, expanded amendment to the definition to be qualified as an accredited investor. The proposed amendment updated and improved the definition to better identify institutional and individual investors that have the prior knowledge. Expertise to invest in private placements such as our real estate syndication investments. The amendment officially went into effect on December 8, 2020.
In the original accredited investor definition, in order to be an accredited investor. You had to meet either a net worth or annual income requirement.
Risks and tradeoffs
Net Worth Requirement – To meet the new worth requirement, you must have a net worth of $1 million or more not including your primary resident.
Annual Income Requirement – To meet the income requirement, you must have at least $200,000 of annual income if you are single and $300,000 of annual income if you are married. This annual income must have been achieved for the last two years and you have a reasonable expectation that it will continue.
Questions to ask
Moreover, the expanded definition still includes these two net worth and annual income requirements. If you already meet at least one of these criteria then nothing has changed for you.
If you don’t meet these requirements, then let’s review the expanded SEC accredited investor definition in more detail.
Practical next steps
Professional Certifications and Designations
If you have passed the Series 7, Series 65, or Series 82 and hold, in good standing. One of these designations then you are now an accredited investor based on these new, expanded SEC guidelines.
Core ideas for accredited investor definition
Moreover, it is likely that most of you reading this have no clue what those exams are. Do not hold those designations. Here is a better description:
- Series 7 – Licensed General Securities Representative;
- Series 65 – Licensed Investment Adviser Representative; and
- Series 82 – Licensed Private Securities Offerings Representative.
It is unlikely that you hold any of these designations so you might be asking why is this important. Read further and I will explain how one of these exams is available for you to study for. Take so you can become an accredited investor.
Risks and tradeoffs
Knowledgeable Employees
This allows “knowledgeable employees” the opportunity to be classified as an accredited investor only for investing in their employer’s security offerings. This would include directors, certain executive officers of the private fund. Or an affiliated person of the private fund that manages investment activities of the private fund. This would also include employees who participate in the investment activities of the private fund.
Questions to ask
Family Clients of Family Offices
Moreover, if you are a natural person and you are a family client of a family office. You can now qualify as an accredited investor.
Practical next steps
In order to meet this requirement, you must come within the definition of a “family” client in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940 (the “Advisers Act”). Be a family client of a family office that itself qualifies as an accredited investor. In addition, also, your investment must be directed by a person who has the knowledge and experience in financial.
Business matters that the family office can evaluate the merits and risks of the prospective investment.
Core ideas for accredited investor definition
Limited Liability Companies
This new, expanded SEC accredited investor definition has now clarified a long-standing staff interpretation that allows limited liability companies with more than $5 million in assets to qualify as an accredited investor. These limited liability companies may not be formed for the specific purpose of acquiring the securities being offered.
Risks and tradeoffs
Other Entities
Moreover, there are a few other types of entities that qualify now including rural business investment companies. These are highly unlikely to apply to you.
Questions to ask
Fastest Way to Qualify without Being a Millionaire or have a High Income
Earlier we mentioned the professional certifications and designations that were now considered in order for you to qualify as an accredited investor. These three exams are now an alternative way to qualify. Require many hours of study prior to taking the exams.
Practical next steps
If you want to consider being an accredited investor by taking one of these exams. Then I would recommend the Series 65 which is basically the exam that allows you to become a licensed, registered investment advisor. In addition, the Series 65 exam is the only exam that does not require you to be sponsored by a registered financial services firm.
The other exams should only be considered if you are considering a career in that field.
Core ideas for accredited investor definition
Moreover, the Series 65 covers topics such as economic factors, business information. Investment vehicle characteristics, investment recommendations and strategies, laws, regulations, and other guidelines.
It is fairly simple to purchase an online study guide for around $400. Study the material for 40-60 hours in order to prepare for the exam. The exam consists of 130 questions and you will have 3 hours to take the exam. You only need to answer 94 of the questions correctly to achieve a 72% or higher to pass the exam.
Risks and tradeoffs
Once you pass the exam you will also need to be licensed as an investment adviser representative in your state. Would need to comply with all state-specific licensing requirements.
Moreover, obviously, this might not be the “easiest” way to achieve accredited investor status. It certainly could be the fastest way so you can reach the income and/or net worth requirements sooner.
Questions to ask
If you are considering or have further questions about taking the Series 65 exam, then feel free to email Andrew Davis, andrew@passiveinvesting.com, Investor Relations Consultant. As he is currently going through the process of studying and taking the Series 65 exam so he can speak first-hand about the process.
Key takeaways for accredited investor definition
- Start with the goal and timeline that fit your wider financial plan.
- Next, review the assumptions, risks, fees, and possible outcomes.
- Finally, compare the opportunity with other ways to use your capital.
Put accredited investor definition in context
Every investment decision depends on the investor, the deal, and the market. Therefore, use the ideas above as a starting point for deeper due diligence. Review source documents, ask direct questions, and seek qualified advice when needed. For more guidance, explore our passive real estate investing education.
A clear review of accredited investor definition
accredited investor definition deserves a clear and practical review. These short checks can support a more informed decision.
- Start with a clear goal.
- Next, define the time horizon.
- Review each key assumption.
- Compare the likely outcomes.
- Test a less favorable case.
- Ask who controls each decision.
- Confirm the fees and incentives.
- Study the market and the deal.
- Check the supporting documents.
- Look for clear communication.
- Compare other choices.
- Keep the full plan in view.
- Write down the main risks.
- Review the source of returns.
- Check the exit assumptions.
- Understand the tax questions.
- Consider the need for liquidity.
- Match the choice to your goals.
- Ask direct follow-up questions.
- Confirm the reporting process.
- Review the operating plan.
- Check the team’s experience.
- Compare the best and worst cases.
- Keep expectations realistic.
- Use qualified advice when needed.
- Document the final decision.
- Review the decision over time.
- Watch for changing conditions.
- Stay focused on the long term.
- Finally, act with a clear reason.