Investments for Accredited Investors
An accredited investor is an individual or entity allowed to purchase unregulated, private securities. These investors are thought to be financially sophisticated and typically include high-net-worth individuals and companies with the means and experience to participate in private investments that are not registered with the Securities and Exchange Commission (SEC).
Accredited investors have access to unique investment opportunities. While the majority of these investments tend to be comprised of real estate there are offerings for other asset classes such as Private Credit, Energy, Lending, Middle Market Business, Senior Secured Loans, Commodities, Renewable Energy, Oil & Gas, and others.
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Accredited investors must qualify, however. In order to qualify as an accredited investor, one must meet specific criteria regarding income and/or net worth.
Income Criteria:
Individuals 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, with a reasonable expectation of the same income level in the current year.
Net Worth Criteria:
An individual who has an 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.
Credentials and Licenses:
Financial professionals with Series 7, 65, or 82 licenses qualify as accredited investors.
Accredited investments can fall under either Rule 506(b) or Rule 506(c) offerings.
Rule 506(b) - This method is commonly used by private equity, venture capital, and real estate funds. The rule allows the raising of capital from accredited investors although no public advertising or general solicitation is allowed during fund raising. Up to 35 non-accredited investors are allowed although they must be sophisticated and receive additional disclosure documents.
Rule 506(c) - This rule allows general solicitation but requires all investors to be accredited with verification by the issuers must take “reasonable steps to verify” accreditation status. These investments were historically used by funds that actively market offering and are becoming more popular. ​​​​
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Private Markets
Near the beginning of the century, we began to see new trends trends in public vs. private companies. The number of publicly listed companies began shrinking as privately held companies decided to stay private for longer or chose not go go public at all. ​​
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2000-2022: The number of public companies was reduced by 38% (7,810 to 4,814)
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2012-2022: Private equity fundraising grew 21% compared to ~7% in the public equity markets
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2022: 87% of U.S. companies with revenues > $100 million were private (18,000 private vs. 2,800) public​
These are believed to be permanent structural shifts and investors need to consider the growing investable opportunity in private markets and how to access them. Considering only publicly traded equities today means investing in less than half of the investable global market. Many institutions, endowments, and ultra high-net-worth individuals began investing in the private markets over two decades ago. This investment history was largely positive and is a useful guide when evaluating private investments for today's portfolios Until now, gaining access to these types of investments was difficult without institutional type capital ( typically $5mm+).
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Fortunately, more and more private equity firms are launching initiatives to work within the financial advisor networks to create investments for the high-net-worth & mass affluent segments of investors. These investments are more palatable than in previous years due to:
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Lower investment minimums
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Simplified tax reporting
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Enhanced Liquidity