What is an Accredited Investor and what are the advantages?

Just as there are different types of property investments, there are different types of investors.

One type of investor which is often mentioned when private equity investing is being discussed is an “Accredited Investor(s)” (“AI”). These types of investors have certain characteristics and features and are active private equity real estate investors. 

Such investors may be retail or institutional type investors, but we will focus on retail AI herein.

So, what is an Accredited Investor?

An Accredited Investor can be described as an individual who is permitted to make certain types of investments (or trade certain securities) even though such investments may not be registered with financial authorities. An AI may include high net worth individuals (“HNWI”), experienced private equity investors or family trusts.

The types of investments involved are not registered and do not follow normal disclosures, and are perceived  to carry an inherently greater risk. Examples include units of collective investment schemes or securities-based derivatives contracts.

Wealth is the primary qualification to be an Accredited Investor, although the origin of such wealth is not a factor. It is one of the main aims of regulatory authorities to ensure that AI are experienced, financially stable, and knowledgeable about relatively risky ventures. Accordingly, in theory, they then have a lesser need for protection provided by regulatory disclosure filings.

The regulations and rules relating qualification as an AI vary from one financial jurisdiction to another and are defined by local and/or national market regulators. Yet, no government agency or independent body reviews an investor’s credentials; there is no certification exam which qualifies a person to become an AI.

However, the Accredited Investor at least must meet certain requirements from relevant authorities: either regarding their income, net worth, asset size, governance status or knowledge and experience.

What are some of the requirements to become an Accredited Investor?

In the US, as the SEC treats the buying of shares in an LLC as securities, thereby enabling the SEC to regulate the purchases by retail investors in unregistered opportunities.. 

An Accredited Investor is therefore, defined under Regulation D of the Securities Act 1933 which states that an AI must:

• their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year;65 or
• their net worth exceeds $1 million (individually or jointly with a spouse), excluding the value of their primary residence.66
• be other persons approved by regulators.

In Canada, The Ontario Securities Commissions or the National Instrument (NI 45 106) provide descriptions of retail Accredited Investors for use throughout Canada; again, these mainly revolve around income and net worth.

An AI must have:

• an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1 000 000,
• an individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 000 000,
• an individual whose net income before taxes exceeded $200 000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300 000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
• an individual who, either alone or with a spouse, has net assets of at least $5 000 000,
• a person, other than an individual or investment fund, that has net assets of at least   $5 000 000 as shown on its most recently prepared financial statements,
• be other persons approved by regulators.

In both the US and Canadian jurisdictions, the foregoing has to be evidenced by relevant paperwork such as:

•  latest bank statement and/or statements from an approved entity about personal assets;
• property title deeds;
• salary slip showing bonuses, other payments received;
• Written confirmation from a employer confirming the income of the person in the preceding 12 months
  

What types of assets or situations do Accredited Investors invest in?

Typically, AI are likely to be offered investments with the possibility of greater returns than non-accredited or retail investors—greater risks but greater returns. Such investments may include:

• private equity: money raised and invested in a fund for buying and selling real estate assets. The fund will close to new investors after the targeted amount has been raised and, within a pre-set time-frame (say 5-10 years), the fund is liquidated, selling its assets and taking profits;

• equity crowdfunding: a “crowd (of people)” invest in an unlisted fund to acquire a multi-family property in exchange for shares in the fund; their share of ownership depends upon the amount invested;

• private placements: a private placement is a sale of shares in a property investment to pre-selected investors, possibly with whom the placer already has a relationship; for LLCs looking to raise capital, private placements is an alternative to raising capital in other ways;

• hedge funds: involves limited partnerships of investors who invest in a pooled investment situation, with borrowed money, in the hopes of realising above average capital gains; Such funds usually trade in relatively liquid assets and use relatively complex trading and risk management techniques with the objective of improving performance. Funds may engage in short selling, using leverage, and investing in derivatives.

• venture capital (“VC”): when start-up companies which have long-term exceptional potential require capital to either set up the business to expand their operations, they may seek funding from venture capitalists. VC is a form of private equity and a type of financing where investors provide funds to such fledgling companies often in return for a position or shareholding in the company.

  As an alternative to monetary assistance, VC can also be provided by  the application of certain managerial or technical expertise. 

What are some of the advantages of being an Accredited Investor?

Some of the main advantages of being an AI include:

• access to unique and, often, otherwise restricted investments not available to a typical investor;
• the opportunity to consistently earn higher rates of returns by participating in more dynamically driven investment opportunities–and thereby, in turn, further increasing wealth in a shorter time frame; 
• a better selection and wider diversification of asset class into which to invest; in some cases resulting in less competition from other, more typical, investors.

On the downside, being an AI often involves higher risk than associated with registered investments, sometimes higher minimum investment amounts of investment required. Also performance fees may need to be paid in addition to management fees and may range between 15% to 30%, although, of course, these can be negotiable depending on the actual project.

CPI Capital has a number of AI as investors in our various multi-family real estate investments.

It’s well known that the primary benefits to such investors include access to unique investment opportunities which are not ordinarily available to non-accredited investors, the prospect of higher returns, and increased diversification in their portfolios.

Accordingly, passive private equity real estate investing is an ideal platform in which AI may participate as they seek to achieve their targeted returns.

Yours sincerely,

Ava Benesocky
CEO, Co-Founder Canadian Passive Investing