As a follow-up to my previous post “How to Raise Money For Real Estate Investing,” I’m going to discuss what is considered an accredited investor in the eyes of the government.

As my previous post mentions, anytime that you solicit to raise money for investing to the general public and get someone to buy into your LLC, you are offering what the government considers a “security.”

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. This is what you want to do.

The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.” The federal securities laws define the following individuals as accredited investors:

  1. a director, executive officer, or general partner of the company selling the securities;
  2. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; or
  3. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

An important note is to realize that “net worth” DOES NOT include the primary residence of a person. All the remaining real estate that they own IS part of the net worth calculation.

The following types of entities are considered accredited investors:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a business in which all the equity owners are accredited investors;
  5. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Now that you know what an accredited investor is, your next step will be to figure out where you find these accredited investors. Look out for an upcoming post on how to find accredited investors.

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Posted in Real Estate.