There is a competitive advantage enjoyed by a certain category of individuals in the investment marketplace. This advantage is not an illegal insider training advantage, but rather a legal advantage available to high income and high net worthindividuals or entities. The advantage in question belongs to accredited investors. These individuals have essentially passed an income test, or qualified through their net worth, in order to have access to certain types of investment opportunities.
Wealth Building Advantages
Having accredited investor status provides specific advantages when it comes to wealth building. Diversification, higher rates of return on investment, and higher yields are a few of the benefits associated with private placement investments.
Accredited investors are individuals who meet specific income and net worth requirements as defined in Rule 501 of Regulation D. This financial status allows these individuals to invest in private securities offerings, offered through Title II 506(b) or 506(c), which are not subject to SEC registration requirements.
Opportunities
There are many promising investment opportunities for those who have met the accredited investor income test or net worth requirement that enable the generation of high risk-adjusted returns. Some examples of these opportunities include commercial real estate, hedge funds, angel investing, hard money loans, late stage pre-IPO companies, and cryptofunds. The investor is responsible for conducting due diligence when accessing these investment opportunities.
Currently the majority of crowdfunding opportunities and real estate syndication deals are only available to accredited investors.
The Specific Benefits of Private Placement Investing
Diversification
As mentioned above, a significant reason to invest in private opportunities is diversification. Investing in assets that are minimally or completely uncorrelated with the market can enhance an investor’s portfolio. Any losses sustained if the stock market drop substantially may be mitigated through the possession of other unrelated investments. An example of this is commercial real estate, which does not correlate in lockstep with the ups and downs of stocks and bonds.
Higher Returns
The generation of high investment returns is a major reason for investing. Certain private placement investments may provide upwards of a 15 to 25% return, while others – particularly hard money debt deals – may only return in the range of 7%. Higher returns generally belong to opportunistic investments that are speculative in nature.
Higher Yields
Accredited investors have the opportunity to invest in private offerings that deliver much higher yields than those available through stocks, bonds, and REITS that pay dividends.
Clearly, individuals who pass the accredited investor income test or meet the net worth qualifications established by the SEC have access to highly profitable opportunities unavailable to others of lesser means. If you are one of these individuals, it is your responsibility to carefully evaluate any opportunity of interest and the potential financial benefits and risks involved.
