As defined by the Securities and Exchange Commission (SEC), an accredited investor is a high-net-worth individual, large corporation, bank, trust, amongst others, with privileged access to higher-risk investments. This status is granted based upon fulfilling at least one of the SEC requirements pertaining to income, net-worth, professional experience, and asset size. Moreover, the SEC classifies a sophisticated investor as a high-net-worth individual with comprehensive investment experience in financial markets.
In this article, industry experts discuss investments only sophisticated and accredited investors can own.
What Is an Accredited Investor?
Before we get started, let’s first break down exactly what a sophisticated or accredited investor looks like. These are interchangeable terms used by the SEC and the investing community to refer to individuals who meet the following criteria:
- Have a net worth of at least $1 million USD, excluding one’s primary residence
- Have a gross income of $200,000 (single) or $300,000 (with one’s spouse) over the past two consecutive years
- Likewise, some investment professionals with licenses in good standings also quality (e.g., Series 6, Series 65, and Series 82)
In short, qualifying as an accredited investor allows you to diversify your investment portfolio in a number of unregistered or high-risk assets and securities, including hedge funds investing. However, as we’ll touch on later, you don’t need to be a sophisticated investor to invest like one. While some asset classes are off-limits, any investor can diversify with a range of non-traditional assets, including annuities, cryptocurrencies, real estate, and even precious metals.
The Top-Rated Assets for Accredited Investors
Private Securities Offerings
“With few exceptions, only accredited investors can invest in private securities offerings for two public policy reasons. The first is the SEC wants to ensure the investor has a level of financial understanding and sophistication about precisely what they are getting into. The second is that they want to make sure the investor can sustain a loss and still have the means to support themselves day-to-day, that one’s entire net worth is not wrapped up in securities with no market and the potential for a 100% loss.”
Marc S. Wilson, J.D. M.B.A. LL.M., Securitas Financial Law, LLC
“Interest in unicorns, which are private companies that have a valuation of
$1 billion or more, has reached unprecedented levels. We have seen this first-hand with the tremendous interest in our subsidiary, Lagniappe Labs, and its proprietary research, which is used to help determine the valuations of these unicorns.”
Ross Barrett, CEO and Founder, Prime Unicorn Index
BlackRock Private Opportunities Fund
“In general, many of the investments that are restricted to accredited investors are in the category of “non-publicly traded”, often referred to as a “private placement” offering. There are many reasons that only accredited investors can invest in them: There isn’t as much regulatory oversight on these offerings as there are on “publicly traded securities”; they are typically very illiquid with many offerings having a 10-year lock-up; depending on what it is, there can be a high degree of risk with a high probability of losing 100% of your investment, and they generally have high minimum investments (e.g. $100,000 or more).
A specific example is the BlackRock Private Opportunities Fund that invests as a co-investor alongside other large private equity groups. The fund’s objective is to invest in 5 or 6 private start-up companies with the goal of being on the ground floor of a company that might experience explosive growth. There is a minimum of $100,000 to get into the fund, and it has a ten-year term once the raise period is over and the fund closes.”
Matthew Stewart, President, Wealth Advisor, Forestview Financial Partners, LLC
Cold Storage Industrial
“This type of asset is one where the investor is a bit more knowledgeable or experienced than your usual Multifamily or Residential investor. Whoever invests in Industrial/Cold Storage understands how the market works in a full circle. People need to eat, and that food needs to be stored somewhere before it hits the supermarket. Diversification is one thing, an Accredited & Sophisticated Investor should understand.”
George Smith, Managing Broker | Partner | Investor, Mandich Real Estate Advisors
Crowd-Funded Real Estate
“Accredited investors are privy to an entirely new asset class of investments, there is more to gain and more to lose. Just because you are an accredited investor doesn’t guarantee your financial growth, but it does open you up to opportunities for major wealth. Real estate has been a tried and true investment opportunity for the long term and with accredited investors, this arena grows dramatically in crowd-funded real estate options. Use real estate wisely to spread your wealth out across the country by focusing on large scale options (such as shopping malls or business campus’s) for lower risk investments alongside upcoming project fix and flips which may be higher risk but hold a much higher return. Venture Capital and Equity funding are two areas that accredited investors have greater access to. Be sure that you invest in companies within an industry or niche market you understand and hold interest in. As the company grows you will want to follow the growth to track and trend your financial investment in their success.”
Jared Weitz, CEO/Founder, United Capital Source Inc.
Direct Participation Programs
“Most frequently associated with oil and gas partnership, this setup has also become common among real estate investors. This setup allows profits in an enterprise to flow back directly to investors, almost like a private equity fund without the fees.”
Robin Lee Allen, Managing Partner, Esperance
“The best one is angel investment in startups and new companies. Angel investors need to be accredited because they are providing a company valuation, which is something restricted to accredited investors by law. Returns on these investments average 27% a year in 2018, making them extremely lucrative. They are offered in the form of convertible debt or direct equity to a startup and don’t have any traditional monthly payments. Angel investors can then help guide the startup to success, receiving their payment when the company raises another round of funding, is sold or does an initial public offering.”
Dennis Shirshikov, Financial Analyst, FitSmallBusiness.com
Renewable Energy Real Estate
“Clean USA Power’s private placement equity funds have been buying real estate for renewable energy projects since 2011. Often wind and solar developers struggle to lease all the land they need for their utility-scale projects because some landowners don’t want leases. Our company steps in and buys the land from these “Sell Only” landowners and then leases it back to the developer. Accredited investors can earn stable quarterly income from the leased land for many years, all while having a positive environmental impact. The situation is a win, win, win, win – These “Sell Only” landowners get immediate cash for their land, the developer gets control of the land they need for the utility project, the accredited private equity investors earn great 10-12% income, and the energy grid is cleaner. Beyond this land infill and long-term holding strategy, Clean USA Power has begun creating investment opportunities for earlier stage solar development. The new solar development fund strategy, while not without risks, has high multiples and shorter target hold periods compared to previous offerings.”
Maxwell Roe, Director Of Business Development, Clean USA Power
Ready to Diversify Like A Sophisticated Investor?
The investment types listed above are merely a sampling of opportunities available to sophisticated and accredited investors. This special status of investors necessitates both the knowledge and financial means to shoulder the risks involved in investing in unregistered securities. However, you don’t need to have a net worth of $1 million to invest like a sophisticated investor. By simply applying for a self-directed IRA, you can diversify your wealth across a wide variety of asset types just as an accredited investor would—all while saving on capital gains taxes to boot.