What is an accredited investor? According to the Securities and Exchange Commission (SEC), the exact definition of an accredited investor is rather long, and includes banks, businesses, institutions, organizations and, of course, a “natural person.” A “natural person” is a real human being, as opposed to a corporation or organization.
First, if you are “any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000,” you qualify as an accredited investor, but you may not include your primary residence in the calculation of your net worth.
Second, if you are “any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with a spouse in excess of $300,000 and have a reasonable expectation of reaching the same income level in the current year,” you qualify as an accredited investor.
Crowdfunding with accredited investors is a solution to the business funding conundrum. Regardless of the business type, there are challenges around traditional funding sources. One of the most difficult barriers to entry is money when launching a startup. When a company is looking to expand, one of the limitations is lack of capital. Finally, when a business is looking to purchase non-performing real estate, one of the restrictions is lack of favorable institutional financing.
Each of the examples presented has a similar problem: conventional means will not fund their dreams. In other words, a bank will not lend unless the perceived risk is low. The era of personal lending is long gone. While there are always exceptions to the rule, in the current day and age it’s very difficult to get funded by a bank with terms that make profitable sense.
Another valuable resource is venture capital. Venture capital is attracted to companies that will have income in excess of $50,000,000 with a value in the hundreds of millions of dollars in a rather short period of time. Generally speaking, venture capital is better suited for tech and innovation companies than for value-add real estate transactions.
Why would a promoter or business owner look to the “crowd,” or general public, for investors? The true answer is that there is a barrier restricting promoters from presenting their projects to the public, or “general solicitation.” This barrier is being removed specifically by the Jumpstart Our Business Startups (JOBS) Act. Finally, it is now possible to offer private placement to the public. Crowdfunding is a powerful tool that continues to garner press. The number of equity-based real estate funds continues to grow and will prove to be a wonderful way for businesses to raise capital. Another benefit is investors get involved in transactions which were previously not available to them.
For the investor, crowdfunding opens new doors to access deals that were previously unobtainable via an online platform where you review the project, verify you are accredited, reach out to promoters, invest in and monitor your returns. Although this is relatively new, anticipate seeing much more in the coming months. Crowdfunding gives you a new ability to invest in real estate nationwide, from the comfort of your home. Any readers who want to learn more can drop me an email and I will share the details about 506(c), the investor’s new advantage.
Before you transfer funds and put your money at risk, it is important to do your homework. Make sure the platform is legally registered. Verify the projects on the platform are real. Confirm the promoters are competent principals in the project. Understand that equity investments carry risk and there are no guarantees. You are an accredited investor for a reason. Please be wise with your investments. QCBN
Bruce B Wuollet is co-founder of Bakerson. He has been creating and managing equity based real estate investments for 13 years. His current focus is bringing private offerings to the public through a crowdfunding platform. You can reach out to him to discuss and/or learn about crowdfunding and 506(c) by emailing firstname.lastname@example.org.