#35: How To Determine If You're an Accredited Investor

Foreign. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone, hope you've had a great week. This week we're going to be talking about the not so secret society of accredited investors. I mean, that's what I like to call it. The first time I ever heard that term accredited investor, it sounded like a secret society. Like you had to interview for it, apply, and then once you were accepted, it opened up a world of investments for you. Well, it turns out that's not necessarily the case. It's either you are one or you are not one based on life circumstances. Kind of like being a parent. You are one or you are not one. And the SEC has put in place a bunch of qualifications. And so if you fit those, then you are one. But it is important to know whether you do qualify or not. So we're going to be talking about that. We're going to be talking about some of the new rules around this qualification. We're going to be talking about why it's important to know, you know, whether you are one or are not one and ultimately how you verify it. So let's dive right in. So if you want to know if you're an accredited investor or not, you have to fit one of these qualifications. And note that you only have to fit one of them, not all of them. The first one is that you have to have an annual income of at least $200,000 as an individual or $300,000 as a married couple or a spousal equivalent, which is one of the new amendments. We'll talk about that. But $200,000 for an individual or $300,000 with a partner. And this must have been at least for the last two years, and there must be a reasonable expectation that this will continue on for the following year. That's one. Qualification number two is that you must have a net worth of at least a million dollars, not including your primary residence. So those were the two major ways that you could qualify as an accredited investor. And so I'm wondering, do you fit or not? Now, there have been some amendments to this rule, especially just in the past year. Some of those amendments are, again, they change the definition for the whole couple situation. Before, it had to be a married couple for that $300,000 mark, but now they recognize spousal equivalents. They understand that not everyone kind of goes through that whole process and actually gets married, but they're long term partners and that sort of thing. So that's loosened a bit. And there's also been an amendment that if you have certain professional certifications or designations or credentials, then you also qualify. For example, if you have a Series 7 or a 65 or Series 82 license, then you also qualify. Now this is important to note because I've heard of certain doctors or high income professionals that maybe don't quite fit the income qualification or the net worth qualification, but have actually been able to study for and get their series one of these series exams and qualify as an accredited investor. And it was important to them to do so. So it's nice to know that there is a workaround and I think over time you'll hear about more certifications or qualifications coming down the pipeline. So look out for that. Also, if you happen to work for a private fund or a family office and just by being an employee of this type of group, you are considered a knowledgeable employee and credit investor as well. Oh, to quickly clarify that family office needs to at least have $5 million in assets under management for those that it might apply to. Well, in any case, it's important to know whether you are one or not because it does open up a whole world of investments to you. And before we jump into that, let's talk about why this designation even exists. I mean, the SEC put it into place because I want to make sure that if you're investing in these type of investments, especially most of them are all these private type investments. They want to make sure that you are knowledgeable enough to make good decisions, that you know how to make the proper, how to do the proper due diligence for these type of things. They want to also make sure that your income can support making these type of investments because in their mind, I guess they consider it, you know, quote unquote riskier and they want to make sure you have enough income to support that. Now I've heard from other people on the other end saying that it's kind of a way of keeping out certain types of people from these type of investments. That it's almost a way to keep the wealthy or keep letting the wealthy get wealthier and that sort of thing. And I think there's somewhere, it's somewhere in the middle there. I think for some of these investments it's important that the right type of people getting into it. So it's good that these rules are in place. So if you qualify as a credit investor, it gives you a tremendous advantage, especially because it allows you to invest in all sorts of these private investments and investment deals. So what are some of these type of investments? Well, it includes many of the private real estate deals that I talk about, the syndications and funds. Most of them fall under something called Regulation d of the SEC. You might hear these numbers 506B and 506C. Well, these things are open primarily to accredited investors only, meaning that they can only sometimes promote to and only take investments from these type of investors. That also includes certain types of angel investments and venture capital, meaning that you won't even get in the door if you're not an accredited investor. Now as an aside, some of these type of investments have a small amount of space for non accredited investors that they deem to be what's called a sophisticated investor, meaning that you have good knowledge of the type of investments, you know how to do the proper due diligence and they allow for that. But that's usually a very, very small percentage, if not at all. So for those of you who are not accredited investors, unfortunately, in terms of having the opportunity to invest in a lot of these things, you really have only at your disposal some of the more public market type stuff like stocks and REITs. You can own your own investment properties, but really not be able to invest in other people's deals. You know, for many of you who know me, I think one of the most powerful ways to leverage your, your time, your capital, is to put it in these passive real estate opportunities like syndications and funds. And hopefully for many of you who are listening to this, you do qualify and you're able to do that. But if you're not, again, there are some opportunities, if you understand, or if you can demonstrate that you are a sophisticated investor. Now, I've been asked before, how do you verify that you are one? I mean, do they ask you for it when you invest, you know, into these type of investments? Actually, it is the case when you go to invest in one of these private real estate investments, for example, they will ask you for a letter of verification. And this letter basically states one, that you do qualify under one of those qualifications you know, mentioned before. And this is something that's given to your CPA or financial advisor to sign off on. Sometimes you can use a third party group like Verify Investor that allows you to give them your tax returns and they can get a letter written for you. And that's another way as well to give your tax returns or your W2 or something like that directly to the investor group as well. Sometimes they allow for that, but either way they need to verify just for their rules and to kind of cross their T's and dot their I's. And part of the SEC paperwork is that they make sure that they get these accredited investor letters from their investors just to make sure they're doing everything that's compliant. So just know if you're sitting there, you do qualify. Just know that there are so many different investments open to you besides just the standard stock market index funds. You have these opportunities where I find that there can be outsized returns and there are ways to mitigate risk on the backside as well too. So for me, I love these type of opportunities, but the most important thing is that you have to learn how to do the proper due diligence for them. A lot of them are not regulated in the same way stocks are, but again, that allows for again sometimes some outsized returns with minimal risk. So in future podcasts I'll talk about the whole sophisticated investor designation. So I'm wondering for those of you who are listening to this, how do you feel about having different classes of investors? Does that help you? Do you feel it's fair? So if you do meet this requirement, that's awesome. Know that there are a vast number of different opportunities available to you. I would highly encourage you to explore those. Learn how to do the proper due diligence so you know you're making good investments. But honestly, there are a lot of good deals out there for non accredited investors as well. Especially if you can prove that you are a sophisticated investor, that you're knowledgeable about these type of investments and look out for those as well. So have a great week everyone. Take care. Enjoy the show. 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