In this video I discuss some important distinctions between accredited and non accredited investors.
Hi, this is Devin Elder. I want to talk today about accredited versus non-accredited investors. If you’ve been looking into investing in a multi-family project, you may have seen these terms thrown around. I want to basically define them at a high level, and why it’s important, why you need to understand this as an investor in a multi-family project. So an accredited investor is defined by the Securities and Exchange Commission as someone that earns $200,000 a year or $300,000 together with a spouse, has earned that in the past, and expects to earn that in the future, reasonable expectation of earning that moving forward. Or they have a net work of $1 million minus their personal residence. So if you meet either of those benchmarks you’re an accredited investor, and I’ll talk about why that’s important in a minute.
A non-accredited investor is simply somebody that does not meet that benchmark, net worth of 1 million minus the house or a certain income level. Why is this important? It’s important because when a sponsor like our company or another sponsor running a multi-family deal is putting together a multi-family investment, they’re going to typically do a 506(b) offering or a 506(c) offering. A 506(b) offering limits the sponsor to 35 non-accredited or unaccredited investors. So let’s call it a $5 million capital raise on a large multi-family project, that investor only has 35 spots for non-accredited investors. Furthermore, those investors must have a certain level of sophistication in understanding finances and how to evaluate investments.
So there can be a cap for non-accredited investors. So you might be talking to a sponsor that says, “Hey, we’re putting together money for a deal. But all our spots are filled up, we don’t have any room for non-accredited investors.” And that’s why, it’s an SEC guideline that you obviously can’t violate, nobody wants to go to jail running multi-family properties.
So for the accredited investors, on a 506(b) offering, it’s usually just a self verification where the investor’s saying, “Yes, check the box, my net worth is X, my income is X, I’m an accredited investor, I’m okay to be in this deal.” Furthermore, the sponsor’s got to have a preexisting relationship with these investors and it’s got to be a substantive relationship as defined by the SEC. So for a 506(b) offering it can’t just be blasted out across marketing channels, so you cannot solicit strangers is the idea with a 506(b) offering. With a 506(c) offering you can market it, but only to accredited investors.
So hopefully all this jargon isn’t making your head spin, but I wanted to put up this video because I’ve had questions from investors, “Do I need to be accredited to be in this deal?” Well, it depends, it depends on what the sponsor’s putting together. Now, if it is a 506(c) offering that the sponsor’s allowed the publicly market, there’s going to be more rigorous process for verifying that the investors are accredited. So the accredited verification process is a little bit easier on the 506(b) side. Those are just two approaches that indicators who put multi-family deals together have in order to raise capital for projects, and just a couple of things you need to be aware of, that’s what accredited versus non-accredited means, you don’t necessarily have to be accredited to invest in a project, but you’ll want to ask your sponsor on any particular investment that you’re evaluating if that’s a requirement or a hurdle, because it may mean you can’t participate in the deal. But it doesn’t 100% mean you’re out. Just means you need to dig a little further.
Hope that helps. Take care.