Q: I was looking at a real estate crowdfunding investment and the site says it's open to accredited investors only. What does this mean, and why are some investment opportunities restricted to accredited investors?
The Securities and Exchange Commission (SEC) aims to protect investors from taking risks they don't understand well (among other functions). Because of this, in most cases where an investment opportunity is offered to the public, there are extensive SEC regulatory requirements that must be met.
The exception is if an opportunity is restricted to accredited investors. The idea is that by restricting an opportunity to investors who have a certain level of financial sophistication, fewer protections are needed. And, if the investments take a turn for the worse, these investors have more room to absorb losses.
For individuals, an accredited investor is defined as having either $1 million in assets excluding a personal residence or having income of $200,000 per year ($300,000 if combined with a spouse) for the past two years, with a reasonable expectation of the same in the current year. Before you can take advantage of any opportunity that is limited to accredited investors, you should be prepared to verify that you meet one or both qualifications.
To be clear, this isn't a perfect system. Not everyone with lots of assets or a high income is necessarily more knowledgeable about investing than those that don't have those traits. However, many investment opportunities -- hedge funds, for example -- are restricted to accredited investors in order to limit regulatory filing requirements by the investment sponsor.
