So, What’s the Big Deal About "Accredited Investor" Status?
ByI just put the finishing touches on an email going out to our private investors list offering a 12-15% rate of return on a cash-flowing loan. Just before I sent it out, I got an email from my partner Steve, informing me that this opportunity was for "accredited investors" only.
If you’ve never heard the term before, the Accredited Investor designation is something that the SEC dreamed up to regulate who is allowed to participate in certain types of investments. The Securities and Exchange Commission (SEC) is best known for reigning over the stock market and those pesky insider trading allegations (right, Martha?) but they also have jurisdiction over private securities and loans offered by little old you and me. 
There are several ways you can qualify as an accredited investor, but the most common are:
- Having a net worth in excess of $1 million dollars.
- Having an income of $200,000/year if single or $300,000/year if married.
Once you meet these requirements, you are deemed to be financially "sophisticated" by the SEC and can then begin to participate in what may be viewed as "high risk" investments that are not offered to Joe-on-the-street by his stock broker or investment advisor.
It’s frustrating to me when my company puts together great investment opportunities and we want to offer them to all the people we know, but we can’t because the government (and our attorney…) won’t let the "little guys" participate.
Technically, we can find ways to include non-accredited investors in many of the projects we do, but the considerable added red tape and bureaucracy makes it inefficient, expensive, and impractical. The challenge with the accredited investor rules (another example of the government protecting people from themselves) is that they prohibit a lot of smart (but not yet rich) investors from taking part in lucrative investment opportunities.
What You’re Missing…
While my friends and I are busy participating in projects like this $1.2 Million loan to 34501 Quincy, LLC where we can earn a 12-15% rate of return on our money, Joe-on-the-street is limited to putting his money in "investments" like savings accounts, CD’s and money market accounts (currently earning 3% interest) or the stock market (haven’t checked today, but not having a good year).
People who run the numbers know that it’s worthwhile to find investments that earn an above-average rate of return in a relatively safe environment. The stock market is great, but it’s not EVERYTHING. We’re told to diversify, but then not allowed to participate in great projects outside the mainstream unless we are already wealthy.
It’s frustrating.
The solution I have found is to take the bull by the horns and participate in putting together my own projects. I don’t have to be an accredited investor if I’m a founding partner in my deals. However, not everyone has that luxury, putting together commercial deals is time intensive! And that’s why passive investments can make so much sense if you’re in a position to take advantage of them.
If you are an accredited investor and you’re not taking advantage of the many opportunities available to you off the beaten track, consider talking to friends who invest, and learning more about the pro’s and con’s of diversifying your portfolio a little bit.
If you’re not an accredited investor yet, keep learning, earning, and investing so that when that designation is one day suitable to you, you’ll be in position to take advantage of it.
If anyone would like to join my company’s mailing list of private investors (you can join whether or not you’re accredited), you can start to see what types of opportunities present themselves, and begin to educate yourself on what good opportunities look like. I’ll keep sending out emails about opportunities – some for accredited investors and some available to everyone, and I hope that one day I’ll hear from you when you’re ready to take advantage of them!
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2 Comments
April 24th, 2008 at 2:50 pm
12-15% return is a good in this current real estate market. On an up swinging my returns are 50-200% on my money. I would suggest to people to have both active and passive investments in their portfolio.
June 5th, 2008 at 2:53 am
Thanks for the definition in a meaningful context for some thing that has not been understood. Possibly I was not willing to understand and accept being on the outside.
Sid