Do accredited investors have an unfair advantage?

11 Replies

Hi bp nation,

It seems like a lot of investment opportunities are targeted to accredited investors.  I know one of the reasons is they are sophisticated and are able to withstand losses.  However if they withstand losses they can quickly become unaccredited.  Are they better deals that the average Jane (me) are not privy to? Do they have access to smokin hot deals while the rest of us are stuck with average returns? Let us in on the secret!

No. They can invest in big deals that require accredited investors such as stock deals, with multiple investors. Other investments that are inherently risky. Like new startup companies. 

I think the smoking hot deals are in buying distressed real estate.

Well more experienced investors will probably have access to more information, but that is probably more a function of the fact that they are more experienced rather than them having some secret power to access smoking hot deals. They probably have more investment opportunities, but that's probably because they've accumulated more capital to work with and/or made more connections from networking.

Yes they do and you can thank your federal government wanting to protect you

Investment opportunities are targeted toward accredited investors not because they are "sophisticated" (plenty of accredited investors gave money to Madoff , Lenny Dykstra, and countless others...having money does not equal fiscal intelligence/responsibility).  Yes, they can withstand losses (however 1,000,000 shares at $00.00 are worth the same as 10 shares at $00.00), but the reason is because they have the resources to invest in the first place...hence the "opportunity".

Think about it objectively: if you had an investment opportunity and had two people, 1) someone with a check in their hand for the amount required or 2) someone who has to borrow money just to invest in your opportunity, who would you go with?

Originally posted by @Jeanette A. :

Hi bp nation,

It seems like a lot of investment opportunities are targeted to accredited investors.  I know one of the reasons is they are sophisticated and are able to withstand losses.  However if they withstand losses they can quickly become unaccredited.  Are they better deals that the average Jane (me) are not privy to? Do they have access to smokin hot deals while the rest of us are stuck with average returns? Let us in on the secret!

Well, yes and no. Yes, in that birds of a feather flock together, I may tell someone I know who can write a check on a good deal before I tell a newbie in RE that has few resources. Welcome to life!

No, in that a real education allows you to flock with the "haves" as they value experts and they seek consultants. An accredited investor has an accountant, an attorney, (or several attorneys) an insurance guy along with friends with varied successful experiences. Become one of those experts! 

Accredited investors are more sophisticated? WRONG! Wealth has nothing to do with being wise or having knowledge, wealth can be a byproduct of those attributes, but not always. Recently met someone who has upper 2 digits of millions in the family and they are as slow minded as a rock. Lucky they have enough sense to talk to their attorney and accountants.

OTH, having wealth exposes the "haves" with a social network that the "have not's" may not start out with, but that can be gained by education, hard work, an ethical reputation and experience.  Life is not a sprint, it's a marathon, use your time wisely and understand people first, then network with those you would like to emulate. There are no secrets in RE, there are secrets to social interaction, gaining wisdom and knowledge. :)  

  

@Bill Gulley

Thanks for the reply. I completely ruled out the power of a high net worth well connected social network.  I have a few (not many) high net worth friends or associates but we never discuss finances.  

Originally posted by @Jeanette A. :

@Bill G.

Thanks for the reply. I completely ruled out the power of a high net worth well connected social network.  I have a few (not many) high net worth friends or associates but we never discuss finances.  

And, it's probably better not to discuss finances, as you become more successful in RE and you simply talk about that aspect without sounding like it's bragging, they may take more interest and ask you about what you do. Tell them without making it sound like a solicitation. You'll know when the have confidence in you and in what you do, never ask for money but simply offer an opportunity for your friends to share with you. It's not about the money in many cases, it's about the game, social impact, community good and the impact that can be made......along with making more money. :)

I'll speak from the point of view of an accredited investor, since I am one.  I'm only speaking of my own experience.  I am not speaking of any specific opportunity and I am not soliciting for any business.   The only advantage to being an accredited investor is that some private placement investments (real estate too) only accept accredited investors and the minimum investment is $100,000.   But not all such opportunities are worthy of investing.  Yes, the returns can be quite good, but there are no guarantees.   Everything still falls on the integrity ad track record of the syndicator/sponsor putting the deal together.  Just as there can be fraud in a common real estate deal, there can be fraud on a multi-million dollar deal. 

Just so everyone is aware....investing in private offerings does NOT require $100k minimum as the post above states.  With new crowdfunding offerings many folks can invest as little as $5k.  The only real constraint here is that it is beneficial to keep the investor count below 100 to avoid Investment Company items and such.   So in theory one could even invest less if the promoter set the share price lower, which they're unlikely to do.  

Further, non-accredited investors will have a more level playing field post Title IV implementation on June 19th of this year.  4-6 months from that and there will be several fund options and other offerings for small companies allowing non-accredited investors.  

Further, many states have intrastate exemptions allowing for non-accredited investors.  Texas is one of many that has recently passed securities laws like this.

Further, 504 offerings vary by state and allow non-accredited investors.  506(b) offerings also allow up to 35 non-accredited investors that are sophisticated.

So yeah....accredited investors are definitely playing on a non-level playing field for access to deal flow.  However, enterprising non-accredited investors can find good projects to fund that allow for non-accredited investors.  It requires networking though because once the issuer solicits funds under 506(c) it eliminates the ability to take in non-accredited investors unless they use a Reg. A+ offering that will become available June 19th of this year.  

Originally posted by @Steven Picker :

Yes they do and you can thank your federal government wanting to protect you

 Very Accurate...  and I doubt that most people know this.  But this statement is so true.

 The gov't stepped in to minimize the loss of the average investor (most of us), which in turn required those opportunities that offer the greatest reward be only offered to those that could absorb the greatest loss (the rest of us)...  to save all of the others from themselves. (all of us.)

So yes!  If you are accredited you may have an advantage.  (Key word= MAY, depending on your level of understanding the above.)

Originally posted by @Jeanette A. :

Hi bp nation,

It seems like a lot of investment opportunities are targeted to accredited investors.  I know one of the reasons is they are sophisticated and are able to withstand losses.  However if they withstand losses they can quickly become unaccredited.  Are they better deals that the average Jane (me) are not privy to? Do they have access to smokin hot deals while the rest of us are stuck with average returns? Let us in on the secret!

Interesting question... but the reason some or many investments schemes are targeted to accredited/sophisticated investors (investors of a certain minimum personal worth) is because you can be accused of securities fraud if you try to offer or involve an unaccredited investor in certain types of investment schemes. 

The logic is that if an investor is accredited (attains a certain level of worth), they are able to personally analyze and measure the level of risk associated with any type of investment and hence less likely to fall prey or be duped out there. 

The intent is to protect investors (and public at large) and reduce levels of fraud although in some ways there may be the referenced unintended effect (whether real or perceived) that some investors (or public) may be crowded out of the market in terms of access to certain types of investments.

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