Accredited Investor versus Sophisticated Investor

If you’ve been looking into real estate investments, you may have come across certain opportunities that require you to be an accredited investor or a sophisticated investor … But what exactly does that mean? Do you need to take an exam or complete specific steps in order to become “accredited”? And how does one measure “sophistication”?

The Securities and Exchange Commission (SEC) has laid out explicit guidelines defining who is an accredited investor and who is a sophisticated investor. These rules, in turn, determine what types of investments you are allowed to participate in — so it’s very important for you to understand them.

In this post, we will clarify the differences between these two types of investors and help you determine which one you are — and therefore what types of real estate investment opportunities you qualify for.

Who is an accredited investor?

You are an accredited investor if you can satisfy at least one of these conditions:

The Income Test: Your annual income for the past two years has been greater than $200,000 (or $300,000 with a spouse), and you expect that to be the case this year as well.

– or –

The Net Worth Test: Your net worth exceeds $1 million (excluding the value of your home).

If you meet either of these criteria then, congratulations, you are an accredited investor. And that opens up a whole new world of real estate investment opportunities for you!

What are the benefits of being an accredited investor?

Being an accredited investor allows you to participate in what are known as “Rule 506” securities offerings. This is a special type of investment that — unlike corporate/municipal bonds, stock in public companies, and publicly-traded REITs — is not registered with the SEC.

Rule 506 securities are a very popular fundraising option among early-stage startups and — in the case of Birchstone Investments — real estate investment firms. Imagine if you could’ve been an early investor in Uber, Lyft, or Airbnb long before they offered stock through an initial public offering (IPO)! That’s the beauty of being an accredited investor; it grants you access to an exclusive class of investment opportunities with immense upside potential.

How do I become an accredited investor?

If you meet either of the criteria mentioned above, then you are automatically an accredited investor. There’s no exam to take or any official certificate.

You will, however, need to verify your status to the issuer of the investment before you can actually put any money down. If using criterion #1 (the income test), you will need to provide pay stubs, W-2s, etc. to prove your stated income. If you use criterion #2 (the asset test), then you must provide documentation regarding your assets and liabilities.

This may sound daunting, but don’t worry; if you are investing with us, we will help you navigate this requirement!

Ok, so then what is a sophisticated investor?

There are plenty of astute investors out there who don’t earn quite enough to qualify as accredited investors ($200,000 per year). And some are just starting out in their careers, so they may not have built up $1 million in net assets yet. However, that shouldn’t lock them out of the best investment opportunities. That’s where the concept of a non-accredited, sophisticated investor comes in.

The SEC defines a sophisticated investor as an individual who has “sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.”

Essentially, this means that you are financially savvy enough to understand what you’re getting yourself into when it comes to private investment vehicles such as Rule 506 securities. For instance, issuers of these securities aren’t required to file a traditional Form 10-K or 10-Q. So, as an investor, you must be adept at using other forms of information to assess the risks and potential return of investment opportunities.

We at Birchstone Investments primarily issue a subset of 506 securities known as Rule 506(b) securities. Because of that, we welcome BOTH accredited investors AND sophisticated investors to participate in those offerings (although we can only accept a limited number of non-accredited, sophisticated investors — by law no more than 35).

Wrapping up

Hopefully you now have a better understanding of accredited investors vs sophisticated investors — and which designation applies to you. If you have any remaining questions or would like to learn about investment opportunities with Birchstone Investments, please contact us.

Interested in learning more about investing with us?

Jerry Hollifield

Jerry is the Managing Principal & Chief Investment Officer at Birchstone Investments, LLC. With a business career that spans more than 30 years, he has been involved in the acquisition, development, financing and management of over $400 million in real estate. In addition, he has been involved in more than 40 Merger and Acquisition transactions with total value exceeding $600 million.