Investors hear the term “accredited investor” bantered about often. Being a qualified or “accredited investor” can open doors to many higher yielding – though often higher-risk –investment vehicles.
For the independent-minded investor, who is not typically attracted to large institutional “plays” sponsored by Wall-Street-type firms, understanding what an accredited investor is and how to qualify to become one is an important first step toward building wealth.
It is estimated that about 8.25 percent of all American households qualify as accredited investors. That is over 10.1 million U.S. households. Further, these households account for over 70 percent of all private wealth in the country or about $45.5 trillion.
The term “Accredited Investor” was created by the Securities Act of 1933 and was further defined by 1982 and 1988 changes in Regulation D Rules. These rules were originally conceived for the “protection of investors” and established three basic criteria for being considered accredited:
There has been a long-standing debate questioning accredited rules and if they really capture the original purpose of protecting an investor. The question becomes, does a Harvard graduate with a Masters degree in finance and $700,000 in the bank really need more “protection” than someone new to the $200,000 income arena who is good at selling automobiles, or widgets, or is the 35-year-old beneficiary of a family trust totaling something over $1,000,000?
As an accredited investor, you are among the top 8.25 percent of financially-qualified individuals in the U.S., which puts you in a fairly elite “club.” It is estimated that the U.S. is currently adding about 1,700 newly accredited individuals per day.
The trick then becomes where to find a good investment. Stepping out of traditional stocks, bonds and ETFs, the road can get a bit curvaceous. Being elevated to a new financial plateau by becoming accredited also comes with its own set of issues. Do you seek out a hedge fund, a venture capital fund, or a private equity fund, only to find minimum investment amounts of $1 million or more that disqualify you quickly?
A “private placement” may be a more likely option for a simple investment vehicle. They are subject to the Securities Act of 1933 and therefore are required to make certain disclosures, but they do not have to be registered with the SEC.
A private placement is a private capital raising event offered to a relatively small number of investors. It is different from a public offering in which securities are made available to the open market to accredited and non-accredited investors.
The most common type of ownership sought by accredited -- but non-super-rich -- investors are equity interests in companies or investment funds. These could include startup companies, private real estate partnerships, oil and gas or mineral development partnerships, and many more.
Oil and gas partnerships are always a viable option, as they are capital-intensive and offer good tax deductions and very favorable return capabilities. As with any investment, be sure to do your due diligence.
Often who you are dealing with is as important as where you are developing.
The accredited investor will find venture capital opportunities, telecommunications companies, construction companies, shipping and aviation businesses, and the list goes on.
Do your homework and exercise due diligence. Even consider taking the time and making the investment to go see the offices and meet the owners of the companies offering these opportunities. The “not-so-real” players may not want you to see their physical space or meet the staff that will be managing your investment.
It’s a brave new world out there. Take your time and think through your investment objectives. Make money.
Redhawk Investment Group
Jack Nichols is a founder and Managing Partner of Redhawk Investment Group, a family-owned and operated energy company with offices in Dallas, Texas and Oklahoma City, Oklahoma. The company developed and uses an investor-friendly business model for use in the private placements of mineral rights aggregations and drilling and development projects.