Are Investments That Need Accredited Investor Status Risky?
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The term ‘accredited investor’ is used by financial regulators to describe individuals or institutions that have sufficient financial knowledge, experience, and resources to invest in certain securities that may not be available to the general public.
In the United States, an accredited investor is defined by the Securities and Exchange Commission (SEC) as an individual who has a net worth of at least $1 million (excluding the value of their primary residence) or an annual income of at least $200,000 in each of the two most recent years (or $300,000 together with their spouse if married), with a reasonable expectation of the same income in the current year.
Investors who want to become an accredited investor simply have to meet these requirements set by the SEC. The primary benefit of being an accredited investor is that they are allowed to invest in securities that are not registered with financial authorities. [1]
Under Regulation D of the SEC, financially sophisticated investors have a reduced need for the protection provided by regulatory disclosure filings. Many accredited investors are high-net-worth individuals (HNWIs), brokers, trusts, banks, and insurance companies.
The accredited investor definition was also modified in 2020 to include individuals with enough professional knowledge and experience, as well as those who have specific certifications. This expanded the list of entities that may qualify as accredited investors based on defined measures of investment knowledge. For example, knowledgeable employees of a private fund are considered accredited.
The company selling unregistered securities can only offer them to accredited investors. Thanks to their high net worth, income, and investing experience, accredited investors are considered financially sophisticated enough to bear the risks associated with these unregistered securities. [1]
With this in mind, many people wonder if these exclusive investments are really considered risky. Let us take a closer look.
Are Investments That Need Accredited Investor Status Risky?
By meeting the criteria to be an accredited investor, individuals can gain access to investments that are not available to the general public.
There are several types of investments that are exclusive to accredited investors, including hedge funds, private equity funds, venture capital funds, private placements, and real estate syndications.
Generally speaking, hedge funds are typically only available to accredited investors because they are considered to be high-risk investments. Hedge funds are investment funds that use various strategies, such as leverage, derivatives, and short selling, to generate high returns for investors.
Similarly, venture capital firms work with accredited investors to invest in early-stage companies that have high growth potential.
Private equity funds invest in private companies that are not publicly traded. These funds typically have a long-term investment horizon and seek to generate high returns by acquiring, improving, and then selling companies. Accredited investors can become equity owners through these private equity offerings.
All investment opportunities carry their own unique risks and rewards. Accredited investments are generally considered riskier than non-accredited investment opportunities. These investments tend to require more capital investment and have long hold periods. They are not as liquid as other investments, meaning investors have to spend more and lose access to their funds for a longer period of time. Even when they are not riskier, they tend to be more complex than your average investment opportunity. [1]
That said, these investments are exclusive to accredited investors precisely because they know what they are doing and have the financial safety net to recover even if an investment does not work out. While they are not completely immune to losses, they are better equipped to evaluate and manage risk.
Just like any other investment, accredited investments have different levels of risk. The reason certain investments require accredited investor status is because they are not registered with regulatory authorities and do not have to comply with certain disclosures. Under federal securities laws, only accredited investors can participate in these securities offerings. This exemption from regulatory requirements allows issuers to offer investments that may be riskier or have fewer investor protections than registered securities.
As with any other type of investment, it is important to carefully evaluate any investment opportunity before investing. Consulting with a financial advisor or other professional can also be helpful in evaluating investment opportunities.
Why the Government Created the Accredited Investor Status
The concept of accredited investors came from the government’s decision to protect novice investors from investments that they did not have sufficient knowledge or experience to evaluate properly. Thus, The Securities Act of 1933 was created. [2]
Having the ability to assess the risks and merits of a specific security is crucial regardless of the type of investment. Uneducated investors tend to make poor decisions that create poor outcomes. On the other hand, knowledgeable investors can make smarter investment decisions that can help them reach their financial goals. Accredited investors have the financial means to achieve these goals without putting themselves at significant risk.
Accredited investors are presumed to have enough investing experience to make the right decisions.
The SEC aims to reduce the potential harm that could result from unsophisticated investors making high-risk investments they don’t fully understand.
It is important to note that there is no formal process for becoming an accredited investor. It is the seller’s responsibility to make sure their investors are accredited before they allow them to participate in these unregistered securities. They will take a number of steps to verify the status of individuals or entities who wish to invest. [1]
The investor will have to answer a questionnaire and provide various documents such as financial statements, W-2 forms, salary slips, and tax returns to confirm their status as an accredited investor. They may also provide letters from reviews by tax attorneys, CPAs, investment brokers, or advisors who have previously confirmed the investor’s annual income and net worth.
Are Accredited Investors More Risk Tolerant Than the General Public?
Risk tolerance refers to the level of financial risk that an investor is willing and able to take in pursuit of their investment objectives. It is essentially the degree of uncertainty an investor is willing to accept when making investment decisions. Investors must be willing to endure a certain level of risk given the volatility in the value of an investment. [3]
It is here that investors usually have different strategies and approaches based on their financial means, goals, and investment philosophy.
Investors with a high risk tolerance are willing to take on greater financial risks, such as investing in high-risk, high-reward stocks or highly volatile markets, in the hopes of achieving higher returns. These investors typically have a longer investment horizon and are able to withstand short-term market fluctuations.
On the other hand, investors with a low risk tolerance prefer lower-risk investments that offer more stability and predictability. These investors may be more focused on preserving their capital and are less willing to accept fluctuations in the value of their investments.
Investors with greater risk tolerance tend to go for equity funds, stocks, and exchange-traded funds (ETFs). On the other hand, investors with a lower risk tolerance often purchase bonds, income funds, and bond funds. [3]
It is generally assumed that accredited investors have a higher risk tolerance than the general public, as they have been deemed by regulators to have the financial knowledge and experience necessary to evaluate and bear the risks associated with certain types of investments. However, this assumption is not always true.
The risk tolerance of an individual investor—including accredited investors—is a personal matter and is influenced by a range of factors, including their financial situation, investment goals, and personal preferences.
What is Multifamily Real Estate Syndication?
Real estate syndication is one example of an investment opportunity that is limited to accredited investors.
Real estate syndication is a type of investment wherein multiple investors pool their financial resources together to invest in a real estate project. The project can be anything from purchasing a single-family home to developing a large commercial property. The investors combine their resources to purchase the property and share in the profits or losses that the investment generates. [4]
Typically, a real estate syndication is structured as a limited liability company (LLC) or a limited partnership (LP). The syndicator, also known as the sponsor, creates the LLC or LP and sells shares to the investors, who are known as limited partners. The syndicator retains a portion of the ownership and is usually responsible for managing the property.
Real estate syndication is often used to fund larger and more complex projects that would be difficult for a single investor to undertake. It can provide investors with the opportunity to participate in real estate projects that they may not have been able to invest in on their own. It can also provide access to a wider range of real estate opportunities. [4]
Multifamily properties like apartment complexes are the most popular among investors because multifamily properties are usually more expensive and therefore harder to acquire as a lone investor. Apartment complexes and condominiums also tend to generate a strong and reliable cash flow because they do not have to worry about vacancies. Due to the number of units available to renters, the cash flow is not interrupted even if one or two units become vacant.
Multifamily syndication is a passive source of income for investors because the sponsor handles everything. That includes property management. Either the syndicator will take care of the day-to-day tasks of the apartment building or they will hire a third party property management company to do it for you. In any case, accredited investors do not have to worry about it. You don’t have to play the role of landlord for this investment.
The syndicator and the passive investors will split the monthly cash flow and appreciation on resale depending on the deal structure.
Work with BAM Capital for Multifamily Syndication
Multifamily syndication offers plenty of benefits for investors. But if you want to make the most out of this investment strategy, you need to work with the best syndicator.
If you are an accredited investor looking to participate in a multifamily syndication deal, work with BAM Capital.
BAM Capital is an Indianapolis-based syndicator with a strong Midwest focus. It prioritizes Class A, A-, and B++ multifamily properties with in-place cash flow and proven upside potential. This syndicator has more than enough experience in terms of acquiring and managing multifamily real estate.
BAM Capital will use its award-winning investment strategy so you can get the best results from your passive investment. Multifamily syndication lets you diversify your investment portfolio while generating passive income. BAM Capital makes sure to guide its investors every step of the way.
This syndicator is known for its consistent track record. They are also vertically-integrated, meaning they can handle everything that goes into putting a syndication deal together. They can negotiate the purchasing of high quality multifamily real estate, and they can also manage the property. In fact, BAM Capital even has its own construction team that handles repairs and renovations. [5]
This syndicator creates forced appreciation and mitigates investor risk while helping them grow their wealth. BAM Capital now has over $700 million AUM and 5,000+ units, making it one of the most reliable syndicators for accredited investors. [5]
No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.
For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.
Fund IV
The BAM Multifamily Growth & Income Fund IV, a private real estate fund, seeks to balance cash flow stability, capital preservation, and long-term capital appreciation while providing superior risk-adjusted returns to investors.
Benefits of Multifamily Investing:
- INFLATION HEDGE: ability to raise rents on short-term leases to mitigate rising costs
- TANGIBLE ASSETS WITH CASH FLOW STABILITY: a consistent income stream that is not impacted by the ups and downs of the stock market
- ACCELERATED TAX BENEFITS: performing a cost segregation analysis and accelerating the allowable depreciation can lead to major tax savings
- SUPPLY & DEMAND IMBALANCE: there is not enough housing supply in most US markets to keep up with the demand
- CAPITAL PRESERVATION & APPRECIATION: typically low-risk investments that should produce optimal risk-adjusted returns
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source https://capital.thebamcompanies.com/2023/04/are-investments-that-need-accredited-investor-status-risky/
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