Accredited Investors and Commercial Property Investing
When a commercial real estate investment is solicited to investors, they must typically be accredited investors. According to the Securities and Exchange Commission (SEC), to qualify as an accredited investor, an individual must have an annual income of at least $200,000 (or $300,000 for married couples) and a net worth of at least $1 million (for both individuals and married couples). This does not include the value of the investor’s primary residence.
Why Do Most Commercial Real Estate Investors Need to be Accredited?
After the passage of the Securities Act of 1933, all financial securities offerings were required to register with the SEC. This can be a long and time consuming process, especially for commercial real estate deals, which may need to gather investors under a tight deadline. However, there are a few exceptions; if the deal is done privately, and is only offered to accredited investors (those meeting the criteria mentioned above), the offering will not need to register. The purpose of these regulations is to prevent inexperienced investors from being taken advantage of and placing their money in investments that they may not fully understand.
What are Examples of Accredited Investments?
In addition to commercial real estate and commercial real estate syndications, other types of common accredited investments include private equity and hedge funds, oil and gas investments, limited partnerships, and the stock of privately held firms.
Can Non-Accredited Investors Place Funds in Accredited Investments?
In some cases, non-accredited investors can invest in accredited investments, albeit with certain stipulations. In addition to providing a “safe harbor” for investments that are not publicly offered, Regulation D of the Securities Act of 1933 states that an investment offering will not have to register with the SEC, as long as it sells investments to 35 or fewer non-accredited investors.
How Does the JOBS Act and Crowdfunding Affect Investor Accreditation Requirements?
The JOBS Act of 2012 permits crowdfunding for equity investments, including commercial and multifamily real estate offerings. This means that real estate investments can be offered to the public and solicited to non-accredited investors. However, there are still some limits; individuals earning, or worth, up to $100,000 can invest $2,000 or 5% of their income (whichever is greater), and individuals earning, or worth, more than $100,000 can invest $10,000 or 10% of their income (whichever is less). This has led to a variety of online real estate crowdfunding platforms, including Fundrise, EquityMultiple, Realty Mogul, and others.