What is an accredited investor?

The SEC describes an accredited investor as an individual who earned at least $200,000 annually for the past two years, with an expected income of $200,000 in the current year. People who aren’t at that income level can still qualify as accredited investors if they have a net worth above $1 million (excluding their primary residence). Couples who wish to qualify must either meet the same net worth requirement or have a combined income of at least $300,000 for the current and previous two years.

The Benefits of Becoming an Accredited Investor

Accredited investors have more investment opportunities than non-accredited investors. Private funds and companies don’t need to register qualifying investments publicly (i.e., register on the stock market) as long as they market and sell these assets to accredited investors. Because of this exemption, accredited investors can invest money into potentially lucrative financial opportunities, such as 506c real estate syndications, that aren’t available to the general public.

Accredited investor requirements exist to protect the average investor from taking on a level of risk they can’t afford. Investment opportunities that are open exclusively to accredited investors can have greater risk and typically have high minimum investment requirements. However, for investors who can take on increased risk, the potential for higher returns and opportunities for diversification often make these investments very attractive and highly lucrative.

Do You Have to Prove That You Are An Accredited Investor?

The short answer is no. You don’t have to prove that you are an accredited investor. The firm that you decide to invest with should have to verify that you are an accredited investor. As part of the verification process, they may ask you to fill out a form and/or provide relevant financial documents, such as tax returns, bank statements, or credit reports.

Can Investors Who Aren’t Accredited Invest in Real Estate Syndications?

Investors who aren’t accredited can invest in 506b syndications, but not 506c syndications (learn more: the difference between 506b and 506c syndications). However, you have to qualify as a sophisticated investor and have a substantial prior relationship with the sponsor to invest in 506b syndications. These individuals don’t meet the income or net worth requirements to be accredited investors.

Instead, they qualify as sophisticated because they have sufficient experience or knowledge in business, financing, and investments to evaluate an investment opportunity’s risks adequately. Sophisticated investors often include individuals such as accountants, financial advisors, medical professionals, engineers, etc.