Accreditation is when an investor proves their income or net worth before they can invest in most alternative investments such as private equity, venture capital and real estate.
The risk-return profiles of alternatives are typically higher than most traditional assets like retail stocks, bonds and mutual funds. Generally, alternative investments have a minimum investment ranging between $25,000 to $100,000. Most of the general public cannot afford to invest that much capital at once, thus making accreditation a critical process in protecting potential investors and sponsors from future financial and legal pitfalls.
Continue reading to learn more context about the accreditation process and alternative offerings.
Accreditation and regulatory oversight
The Securities and Exchange Commission (SEC) requires that Private Equity Real Estate only be offered to investors who meet specific financial criteria. To comply with this law, sponsors typically need to verify* each investor to ensure they are accredited before they can commit capital to any offerings. Once accreditation is verified, investors can invest in higher-risk alternative investments such as private equity, venture capital, and real estate offerings.
*Not all 506 offerings require this process.
Accreditation and authorized third-party organizations
Accreditation can be verified through third parties, as authorized by regulatory bodies, requiring the evaluation of financial qualifications and background of people looking to invest in alternatives. These accrediting agencies verify income or net worth, ensuring compliance with federal investment laws in compliance before any investment is approved.
Accreditation requirements vary per investment class
Accreditation requirements depend on the type of alternative investment and the accrediting agency involved. For example, to defer tax on an eligible gain, investing in a Qualified Opportunity Zone Fund within 180 days of realizing capital gains can provide investors with tax benefits not found in any other program in the country. For example, investors can receive a five-year tax deferment, meaning they can hold off on paying taxes on the gains they rolled over into a QOZF. Additionally, upon a 10-year investment, investors are not taxed on the earnings made. They keep 100% of it.
In general, if you don’t defer the gain, the gain would be recognized for federal income tax purposes on the first day of the 180-day period.
Accreditation provides access to high-risk / high-reward opportunities
Alternative investments offer potentially higher returns than traditional investments but also have higher risks. Accreditation allows investors to access investment opportunities not available to the general public, potentially offering greater diversification and opportunities to earn higher returns. For example, an investor may commit capital to adaptive reuse, an opportunistic project that repurposes a hotel and converts it into a multi-family apartment community upon accreditation.
Remember that accreditation is just one step in the investment process. Investors should carefully evaluate all opportunities before investing by understanding their risk-return profiles, helping ensure they have the investment appetite to commit the minimum capital required. By meeting accreditation requirements, investors can add alternative investments to their portfolios that best support their estate and wealth planning goals.
Accreditation: The process by which an investor proves their income or net worth to invest in certain alternative investments such as private equity, venture capital, and real estate.
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Caliber is a leading vertically integrated asset management firm whose primary goal is to enhance the wealth of investors seeking to make investments in middle-market assets. We strive to build wealth for our investor clients by creating, managing and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and in-house client services. Caliber’s middle-market specialty allows the Company to compete with agility and speed in an evolving arena of alternative investments. Additional information can be found at Caliberco.com and CaliberFunds.co.
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If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.