Real estate syndication deals are transactions between a sponsor and a group of investors. It is a way for investors to pool their resources together and go after bigger deals than anyone could by themselves. Typically, in the past only the wealthiest and well-connected people could participate. With the rise of real estate crowdfunding and real estate syndication popularity, more investors want in on the action. One question usually asked up front from a sponsor to the investor is their accreditation status. Are you accredited or are you non-accredited? The accredited investor will mostly likely know they are accredited while the non-accredited might now know what it means.
Accredited Investor
An accredited investor is someone or some entity that is allowed to trade securities that may not be registered with financial authorities like the Securities and Exchange Commission (SEC). They are considered high net worth individuals or an entity such as a bank or insurance company. They have access to investment opportunities that a non-accredited does not.
To be an accredited investor the person or entity must satisfy certain conditions. The SEC says they must have an annual income exceeding $200,000 for an individual or $300,000 for joint couple for the last two years with the expectation of earning the same or higher for the current year. A person may also qualify if the individual or joint net worth exceeds $1,000,000, excluding primary residence. Last year the SEC amended the definition of accredited investor to include financial professionals with the series 7, Series 65, and Series 82 licenses as qualifying natural persons. There are several other changes made you can find here: SEC.gov | SEC Modernizes the Accredited Investor Definition
Non-Accredited Investor
Basically, a non-accredited investor is anyone who does not meet the above requirements of an accredited investor. A non-accredited investor will not have the same investment opportunities that an accredited investor would. The SEC limits these investments to save a non-accredited investor from the risk of losing money.
The JOBS Act from 2016 did expand the capabilities of equity crowdfunding to allow non-accredited investors to privately invest in companies for the first time since the Great Depression. Investors making less than $100,000 per year can invest $2,000 or 5% of annual income, whichever is greater. Investors making greater than $100,000 per year can invest up to 10% of their annual income.
Why Does This Matter?
SEC rules 506(b) and 506(c) of Regulation D, play an important role in federal and state securities law contexts. They are defining rules of how you can invest in real estate syndications or private placements. I am not a lawyer so you will want to talk to one before investing but they are important to know. You can learn more about these rules here:
506(b): SEC.gov | Private placements – Rule 506(b)
506(c): SEC.gov | General solicitation — Rule 506(c)
506(b)
If you are a non-accredited investor you can invest in a real estate syndication under this rule if you have a preexisting relationship with a sponsor. These deals are not allowed to be advertised so you will need to network with someone putting these types of deals together.
506(c)
A deal can be advertised to the public under this regulation, but only accredited investors are allowed to invest in a 506(c) offering.
Again, you will want to check with an attorney for more specifics, this is just to get a general awareness of the rules.
Conclusion
Real estate syndications and private placements are some of the most lucrative investments an investor can make. In the past it was only for the wealthy and connected. As awareness builds for these types of investments, more money will flow into them, and competition will go up.
