After researching multifamily apartment syndications, are you pondering
whether you’re an accredited, non-accredited, or sophisticated investor? If so,
explore this article to learn more. It is important to understand the different
types of investors and what opportunities are available to each. This will help
you make informed decisions about which investment opportunities are right
for you. Good news – We work with accredited and non-accredited (or
sophisticated) investors alike who are interested in our future multifamily
apartment investment opportunities.
However, there are a few definitions to note. Accredited investors are defined
by the SEC as individuals who earn an annual income of $200,000 or more
(or $300,000 jointly with a spouse) and have a net worth exceeding $1 million
excluding the value of their primary residence.
Non-accredited investors are not held to the same standards as accredited
investors, yet must demonstrate that they have sufficient investment
knowledge and experience to make informed decisions about investing in
investments.
WHAT DOES IT MEAN TO BE ACCREDITED?
To be an accredited investor, you must meet one of the conditions outlined in
Rule 501 of Regulation D, as set by the Securities and Exchange Commission
(SEC). These conditions include having a net worth exceeding $1 million,
individual income greater than $200,000 per year, or joint income greater than
$300,000 per year. Other qualifications for being an accredited investor
include holding a professional certification from an accredited institution or
being an executive officer of a private fund.
WHY IS THIS SIGNIFICANT?
The SEC designates certain investments available only to accredited
investors in order to promote investor safety. An accredited investor either
has the financial wherewithal to absorb a loss or the expert-level
sophistication to understand the risks of private offerings. The SEC’s
definition of an accredited investor prior to 2020 excluded some qualified and
knowledgeable investors from opportunities for investment.
HOW ARE SOPHISTICATED INVESTORS CLASSIFIED?
Sophisticated investors are defined by the SEC as those who “have sufficient
knowledge and experience in financial and business matters to make them
capable of evaluating the merits and risks of the prospective investment.
Many countries recognize the sophisticated investor status, although there are
no formal qualifications to be classified as such. In the United States,
sophisticated investors might have fewer investment opportunities than
accredited investors. Under Rule 506(b), securities may not be sold to more
than 35 sophisticated investors, which minimizes the overall investment
opportunities available. However, this is noteworthy because it allows
sophisticated investors the opportunity to invest in these offerings.
IMPORTANCE OF PROPERLY CLASSIFYING INVESTORS
Investment companies are primarily responsible for classifying investors.
Many jurisdictions give non-accredited investors the legal right to rescind their
investment, which can be a significant challenge for companies. The SEC
requires greater disclosures from companies working with non-accredited
investors and places caps on the number of non-accredited investors in
certain offerings. •Investment companies unknowingly working with non-
accredited investors are subject to SEC penalties. The SEC requires that
companies provide greater disclosures to non-accredited investors and places
caps on the number of non-accredited investors in certain offerings. Any
company will find it challenging to comply with rules for non-accredited
investors when they believe their investors are in fact accredited.
CONCLUSION
In summary, there are a few other ways to qualify, yet these are the two main
factors….These conditions include having a net worth exceeding $1 million,
individual income greater than $200,000 per year, or joint income greater than
$300,000 per year. Or having a net worth exceeding $1 million, excluding
one’s primary residence.
The IRS does not want people to invest all of their money into one thing and
then have financial difficulties. First note, in order to invest in a 506b, you
don’t need to be accredited, but you do need to have some understanding of
risk and the type of investment. Secondly, note if you have prior investment
experience, this helps you qualify to invest in a 506b, even if you don’t meet
the minimum income and net worth requirements.
Under certain exemptions, deal sponsors (general partners) are able to find,
structure, and operate deals while only accepting limited partners to help
finance the equity needed to stabilize the property. Lenders usually finance
the rest of the money, which typically ranges from 55-75% loan to cost
depending on market conditions. Limited partners (LPs) are passive investors
who only write a check to invest in the deal and vote on capital events, like
refinancing or selling the property. They may also have the capability to vote
to replace the deal sponsors if they aren’t doing their job satisfactorily.
Whether accredited or sophisticated, investing in a multifamily property can
offer higher, more stable returns and lower risk than other types of
investments. Real estate syndication may be the right choice for you if you’re
looking to diversify your portfolio. If you choose to participate in multifamily
apartment syndications, be certain to vet your deal sponsors before making
any decisions.
If you would like to learn more on this topic, click here.
If you are interested in future investment opportunities, click here.
By Kelsie Mans-Ray
KMR Multifamily Acquisitions / Syndicator
NOTE: This information is of a general, educational nature and may not be construed as tax, financial, or legal advice pertaining to a specific offering, exemption or situation.
