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What are Accredited and Sophisticated Investors

Unregistered Securities

When someone invests in a syndication they are essentially buying a security. A security is usually thought of as a stock of bond, but, in this case it is ownership in an LLC that owns an apartment complex. Securities are regulated by the Security and Exchange Commission (SEC), which enforces the law. In the case of an apartment syndication, the security is not registered with the SEC, as the registration process is very time consuming and expensive. Instead, syndicators use the Regulation D exemption from registration.
However, to qualify for this exemption, the issuer (i.e., the sponsor of the syndication) must only allow Accredited or Sophisticated investors to invest. There are some nuances to the type of exemption used and which investors can invest in each of those. In a later article, I will discuss those details. 

Accredited Investor

An accredited investor is a person or company that meets certain net worth or income requirements. But, more importantly, is someone that understands the risk of the investment. Since syndications are not registered with the SEC, they may carry more risk as they have not been thoroughly evaluated by the regulatory body. Given the potential for high returns and high risk in a syndication, the investor needs to both understand the risk and have the financial stability to withstand a potential complete loss of the investment. 

An investor is considered accredited if they have a net worth of more than $1M, excluding their primary home, or makes $200K/year or $300K/year with a spouse in the last two years, with the expectation that they will make the same income this year. 

For an entity to be accredited, the company, charity, trust, or benefit plans need to have $5M in assets. 

Sophisticated Investor

A sophisticated investor does not need to meet the same net-worth or income requirements as accredited investors. However, the investor must have the ability to understand the risk of the investment they are making and have enough net-worth to sustain a total loss of the investment without financial hardship. A sophisticated investor should also demonstrate that they have experience in investing in alternative assets beyond just stock and bond funds in their retirement account.

How to Become Accredited

There is no formal way to become accredited beyond the income or net worth tests described above. However, the issuer of the private investment should make a reasonable effort to ensure that the investor meets the requirements. Depending on the type of deal, this could be a self-certification or the investor may need to provide documentation that they meet the requirements.   

*Disclaimer

Nothing in this document should be considered investment, tax, or legal advice. It is for education and entertainment purposes only. Always consult with your investment, tax, and legal professional before you make any investment decision. Investing in private syndications is risky and you may lose all your invested capital.