While both accredited and non-accredited investors may employ similar investment strategies and seek to maximize returns, accredited investors have access to a depth and breadth of investment opportunities that are simply not available to the ordinary investor. Accredited investor status is strictly regulated by the SEC and requires verification, such a 3rd party verification letter.
The main advantage of accredited investor status is that many investments outside the realms of publicly traded, SEC-regulated exchanges offer exponentially higher potential returns. However, with higher returns comes higher risk, so the SEC has limited these opportunities to those investors it deems having sufficient wealth or specialized knowledge.
What is an Accredited Investor?
An accredited investor is essentially any business or individual permitted to trade securities that may not be registered with financial authorities, as defined by the guidelines of the Securities and Exchange Commission (SEC).
The Dodd-Frank Wall Street Reform and Consumer Protection Act defines an accredited investor as someone who is financially sophisticated.
The SEC requires investment sponsors to only admit eligible investors under Regulation D (Reg.D) of the Security and Exchange Acts. For more specific qualifications, see our guide on "How to Become an Accredited Investor."
What is a Non Accredited Investor?
Non accredited investors refer to people in the general public who have not been vetted to invest in unregistered securities. The Securities and Exchange Commission (SEC) closely monitors and controls activities surrounding investments launched on public exchanges, such as the New York Stock Exchange (NYSE) under the 1933 Securities Exchange Act (plus amendments). However, it goes substantially further, embracing secondary market public activities under the 1934 Securities Exchange Act (plus amendments).
Non accredited investors cannot pass Regulation D protocols, which means the would-be candidate fails to:
- Convince an SEC-recognized advisor (e.g., lawyer, CPA, etc.) to verify them as accredited and secure a 3rd party verification letter.
- Substantiate an annual income of above $200,000 (for individuals) or $300,000 (for couples) in the current year and two years back.
- Show proof of net worth (i.e., deduction of total liabilities from gross assets) over $1 million excluding the private residence (with substantial documentation).
- Qualify as:
- A “company insider”
- A “similar investment insider,” otherwise labeled as “knowledgeable”
- Possessing acceptable SEC and/or FINRA certifications.
What are the Differences Between Accredited and Non Accredited Investors?
Accredited investors are differentiated in that they have passed the rigorous qualifications to prove either their net worth, income or other special qualifications. Meeting the criteria alone is not enough without proof/verification, covered in our guide on “How to Become an Accredited Investor”.
Essentially, accredited investors qualify to invest in Regulation D investments (see examples below), which doesn't preclude them from investing in SEC-registered opportunities. Non-accredited investors can only invest in SEC-registered assets.
What Investment Options are Available to Non Accredited Investors?
The SEC regulated products must meet certain criteria, including:
- Traditional investment strategies
- Transparency on history and credentials
- Strict board governance
- Rigid rules for distributing earnings
- Easy-to-understand business models.
It's a relatively straight and narrow road to travel where management must play by the rules, bringing investors significant peace of mind. Getting in and out of these assets is mostly seamless and effortless through recognized and popular public trading forums.
The following are typical SEC-registered investments:
- Publicly traded equities, treasury stocks, indexes, and mutual funds
- Exchange-Traded Funds (ETFs) and REITs (real estate investment trusts)
- Debentures and bonds.
- Swaps in any of the above.
- Futures and derivatives in any of the above.
- Cryptocurrency on a registered exchange.
Of course, non-accredited investors can also invest by starting their own businesses as long as they’re not promoting equity in it to outside investors in a manner that contradicts SEC protocols.
What are Good Investments for Accredited Investors?
Accredited investors have access to a wide range of unregulated investment opportunities that do not meet the strict SEC guidelines. Many options in this category reflect one or more of the following characteristics:
- Short backgrounds: sometimes fresh startups with no history.
- Real estate developments with little or no current development
- Preference for a small but knowledgeable closed group of investors vs the general public
- Complex business models that are difficult to describe and, therefore, unsuitable for mass public consumption
- A resistance to zero-tolerance reporting schedules
- A need for substantially more management flexibility than the SEC allows
- Particularly with real estate, offering tax advantages that the SEC regulations don’t accommodate
- Exit routes that are not always clear in the absence of public platforms.
Due to the higher potential risk for accredited investment products; regulators expect a much higher level of financial sophistication to conduct their own due diligence. At the same time, opportunities outside of SEC registration generate multiple benefits across a broad spectrum of industries.
Venture Capitalists
VC professionals are the spearheads uncovering the AirBnBs, Pinterests, Ubers, and Angry Birds in their earliest stages of development. The payoffs, as you can imagine, can be spectacular!
Some of the most significant private funds on the planet are VC powerhouses like Hillhouse Atlantic ($30 billion in assets under management), Insight Venture Partners ($18 Billion), and Iconiq Capital ($14.5 Billion). These highly skilled teams have finessed funding emerging entrepreneurs globally to the nth degree, knowing that one success makes up for ten failures.
The mainstream VC formula has been so successful that the country’s foremost qualified investors—pension and endowment funds—are eager for a piece of the action. They view venture capital positions as "alternative" and a wise diversification. Unfortunately, demand exceeds supply, so newly minted investors entering the accredited circle can't get even a whiff of a VC opportunity without an inside track.
Hedge Funds
We're talking here about private companies such as Blackrock Advisors (controlling nearly $800 billion in assets) and QAR Capital Management ($164 billion) taking this investment vertical into the stratosphere. They involve activities as:
- Shorting regulated equities.
- Trading derivatives in every shape or form.
- Applying mathematical configurations that boggle the mind to diverse alternative assets (e.g., cryptocurrencies, art, collectibles, distressed real estate, and energy resources).
The bottom line is the net results consistently outperform most traditional vehicles. Results are, in general, outstanding for those lucky enough to align with exceptional private fund managers.
Real Estate
The main competitors under this heading in the SEC channel are REITs. These gigantic companies specialize in property investments with massive positions in practically every vertical you can think of. Indeed, single-family, multifamily, offices, heavy industrial, warehouses, trailer parks, and garages are the tip of the REIT iceberg.
REIT management, in most instances, is stellar—seasoned professionals with extraordinary expertise. The most compelling motivation behind investing in this registered category is that the SEC prescribes:
- Distributing 90% of REIT net earnings annually.
- As a result, cash flow is excellent
- With ROIs around 15% pa.
- The two negatives are:
- REIT managers retain only 10% of earnings to reinvest in the selected assets.
- The earnings distribution via dividends leaves no room for special tax allowances.
Alternatively, we observe accredited real estate investments that offer considerably more benefits to select investors without severe drawbacks.
Kona
Kona Development Partners, LLC (Kona) is a luxury single-family (SF) developer that offers a potentially lucrative accredited investor opportunities. Although Kona isn’t SEC-registered, it reflects numerous checks and balances you'd expect to see with a REIT. Furthermore, it has the following investment advantages:
- It's in a magnificent location—the Kona coastline in Hawaii—amid classic island beaches, fantastic surfing, and unsurpassed hospitality.
- The Kona region’s property values outperform the state's excellent results, with recent capital appreciation well north of 30% year-on-year.
- There's zero mortgage funding in the investment formula—one can't get more conservative than that!
- The general partners convincingly predict IRRs well above 25%, not counting tax advantages investors' financial advisors can leverage (unlike REITs). As partners in a private company, potential tax benefits include depreciation deductions and capital gains tax discounts.
- The general partners' record of achievement—an impressive one billion dollars in real estate projects completed—stands up against the best REIT managers.
- Overall, the project represents a captivating investment in an elevated SF lifestyle for upmarket Hawaiian visitors and residents.
- The company manages all the moving parts in-house with demonstrated general contracting, land appraisal, and property management expertise.
- The general partners guarantee to withdraw zero fees until they return investors' total capital.
- Peace of mind exit options, although a long-term view is encouraged.
- A memorandum agreement with no confusing small print. On the contrary, an extraordinary degree of transparency.
- You only need $100,000 to buy a Kona investment unit, and there’s no restriction on the number of units you can acquire.
Kona typifies why many opt for the accredited investor route with proven professional general partners.
Private Equity Funds and Crowdfunding
Both crowd funding and private equity funds overlap all the verticals in the accredited investor space. However, they are different mainly in structure. For example, real estate ventures, VC initiatives, and hedge funds can offer qualifying investors invitations to enter a private equity fund.
On the other hand, crowdfunding connects to raising capital online via specific crowdfunding websites, social media, and other platforms. It relies on offering minimal stakes in businesses that can't go public. The fact that these offers stream through the internet requires due diligence for participants to:
- Exercise extra care regarding the general partners managing the projects
- Ensure promoters protect their confidentiality.
Still, for the right situation, crowdfunding is a potential way to diversify without putting a large slice of your assets into one investment.
Conclusion
In 2022, accredited investors in the US will continue to explore VC funds, hedge funds, hybrids of both, and exciting real estate ventures. Syndications in every vertical pour into the environment weekly. Still, few can hold a candle to the Kona project in Hawaii. Kona checks all the critically accredited investor boxes and competes with the best REITs.
FAQs: Accredited and Non-Accredited Investors
What happens if I falsely claim to be an accredited investor and invest?
Generally, nothing happens to the investor. However, if caught, the investment sponsor may be held liable by the investor, claiming inadequate protocols or the SEC. However, private equity agreement waivers generally protect sponsors from investor misrepresentations. The promoters simply need to demonstrate that they went to reasonable lengths to verify accredited investor status.
Do anti-fraud provisions apply to unregistered investments?
Yes. Even unregistered investments are subject to anti-fraud laws. Any company or company representative is responsible for false or misleading statements they make, regardless of whether the statements are verbal or written down. These laws may be enforced through criminal, civil or administrative proceedings.
In 2022, accredited investors face exciting opportunities in various markets and industries. We understand there are "horses for courses," and everyone has particular tastes for selecting alternative investment options. However, we believe that Kona Development Partners stands head and shoulders above the rest. In general, close behind is real estate - an asset category that's proved itself for decades.
