What Is An “Accredited Investor” And...

sharks If you’re in the private money getting arena at all, one term you should get familiar with is “accredited investor”.

And no matter how you plan on structuring your investment opportunities, you must know whether the people you’re working with are accredited or not and keep this information on record.

Accredited Investor Defined

The term, accredited investors, has to do with securities laws – both federal and state – and making sure you comply with the restrictions that go with setting up a private lending transaction. While these securities laws can vary by area, an accredited investor is defined as:

A “natural” person whose individual net worth, or joint net worth with spouse, at the time of purchase, exceeds $1M, excluding the value of their primary residence, calculated by subtracting from the estimated FMV of the property the amount of debt secured by the property, up to the estimated FMV of the property;
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; or
A trust with assets in excess of $5M, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
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 $5M;
A charitable organization, corporation, or partnership with assets exceeding $5M;
A director, executive officer, or general partner of the company selling the securities;
A business in which all the equity owners are accredited investors;

Why Does This Matter?

Well I’m glad you asked. Because it does :-)

If you're in area where a private lending agreement may be considered a security, whether it's a one-to-one transaction (one lender to one property) or pooling or a syndication – however you're setting it up, there may be a certain rules to follow about the number of accredited and unaccredited investors you can work with.

But also how these rules apply to you will vary based on the securities laws for each area. Some areas, for example, even provide exemptions for real estate that would not require private lenders in certain types of transactions to be "accredited investors" as defined by law, while in other areas, it's possible that they may still need to be.

So this is my first piece of advice...

The only way to know for sure is to check with a local attorney with SEC knowledge. Have a short conversation with them about your local rules for accredited investors and how they do or don’t apply to you based on your business model and how you're structuring private loans. This shouldn't cost you all that much – just think of it as a necessary, one-time investment in your business.

Secondly, regardless of your local rules, it's always good to know whether or not your private lenders would qualify as accredited. No matter how you're structuring your transaction, even if it's one-to-one and you're in a situation where your state has a real estate exemption, it's still a good idea to know who of your accredited investors, if any, are accredited. That way, if the SEC comes knocking on your door, you’ll at least be prepared and look like you've got your act together.

Hence my second piece of advice...

I always recommend having an accredited investor questionnaire as a standard part of your initial presentation to any potential private money lender. Basically just a fill-in-the-blank form that asks all the right questions to uncover whether they’re accredited or not.

{Mogul Elite members: Download a free copy of Patrick's Accredited Investor Questionnaire in the Power Pack tools for this lesson.}

So bottom line...

I realize this is not super interesting stuff, but it is super important. These are not rules you want to break, and ignorance is most definitely not bliss. So part of your personal due diligence needs to be checking on these regs in your area by seeking good, professional business advice from a local SEC wise attorney and finding out how the rules apply to you.

And also, just go ahead and get the questionnaire filled out and on file for every potential private money prospect. Especially just for any what-if scenarios, having that on file will help safeguard you.

1. Seek out a local expert. Locate a local attorney with SEC knowledge.

2. Get the local scoop. Have a short conversation with them about your local rules for accredited investors and how they do or don’t apply to you based on your business model and how you're structuring private loans. This shouldn't cost you all that much – just think of it as a necessary, one-time investment in your business.

3. Start using an "Accreditted Investor Questionnaire". Just incorporate it as a standard part of your initial presentation to any potential private money lender. And keep it on file. (see Patrick's in the Power Pack tools for this lesson)