The Securities and The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. Exchange Commission (SEC) was created after the 1929 financial crisis brought chaos to US investors. The commission’s primary goal is to protect unsophisticated investors from participating in investment opportunities that they might not understand or from taking on too much risk without adequate information. Accordingly, it created a category of investor referred to as accredited, which means the individual (or entity) is eligible to invest in a broader range of investment options than others. In order to be considered accredited, an investor must meet at least one of the following qualifications:
- Have an annual income of over $200,000 ($300,000 with a partner) for at least two previous years and an expectation of the same for the current year.
- Have a personal or joint net worth of over $1 million, excluding the value of the primary residence. For entities, the minimum net worth is $5 million.
- Be an investment professional holding an appropriate license such as Series 7, Series 65, or Series 62.
Investors who qualify by these criteria can be accredited for most restricted offerings. However, it’s important to note that the company or entity offering the investment decides which investors qualify. While these are among the common means of being accredited, the SEC offers a comprehensive list.
In addition, non-accredited investors may be able to participate in offerings for which they would not otherwise be eligible if they are affiliated with the company selling the relevant security. Banks and other institutions can also participate in restricted investment options.
How does the SEC protect non-accredited investors?
Non-accredited investors are restricted from investing in specific offerings that may include hedge funds and private equities. An investment restricted to accredited investors can bypass registration with the SEC, allowing it to forgo presenting some disclosures to potential investors. These investments are often called private placements or Reg D offerings. The issuing company is only obligated to provide basic company information, in contrast to the detailed information required for securities registered with the SEC.
The working theory is that investors with fewer assets, lower income, or different professional experience may be misled by potential opportunities that don't have to comply with disclosure and information requirements and shouldn’t be allowed to risk significant amounts of capital on risky opportunities.
Why do Delaware Statutory Trust (DST) investments require accreditation?
DSTs can be attractive investments, offering the opportunity to purchase a fractional interest in a wide range of real estate assets. Sponsors create DSTs by pooling the assets of participating beneficiaries (investors in DSTs are referred to as beneficiaries) to invest in direct real estate ownership. DSTs may focus on any commercial real estate sector, including multifamily housing, office property, medical, industrial, or retail.
While the minimum investment for a DST varies, it typically will exceed $100,000. This threshold is one reason why participation requires accreditation. DSTs are highly speculative and also have significant holding periods—often as much as ten years or more—making them highly illiquid. Investors who need or want to exit before the scheduled termination may have difficulty divesting their shares. The DST sponsor will need to ascertain your accreditation before allowing you to invest.
Do I need accreditation to participate in crowdfunding?
Some crowdfunding opportunities are accessible to non-accredited investors. For example, the 2017 Tax Cuts and Jobs Act opened up some eligibility for start-up companies to expand the potential investor pool for equity crowdfunding. Each specific investment offering will specify whether the participants need accreditation or not.
Authored by Realized®.
Realized helps you exchange 1031-eligible investment properties for portfolios of commercial real estate that are customized to your shifting income needs, risk appetite, and investment goals across generations. By creating portfolios of fractional interests in Delaware Statutory Trusts (DSTs), Realized makes it easy to diversify investments across real estate sectors, geographies, and Sponsors.
Contact Realized to learn more about their due diligence and portfolio construction methodologies.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure.
All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested. No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
There is no guarantee that the investment objectives of any program will be achieved. And there is no guarantee that you will receive any income.