Must I be an accredited investor to join apartment syndications?

If you’re a doctor looking at apartment syndications, you may have heard the term “accredited investor.” What does that term mean? And, most importantly, do I need to be an accredited investor to realize the many benefits of apartment syndications?

Accredited investors are defined as individuals who meet certain income or net worth criteria, as defined by the Securities and Exchange Commission (SEC), which allows them to invest in private securities offerings, such as apartment syndications. However, not all apartment syndication offerings require investors to be accredited, and the regulations that govern these offerings can be complex. This article aims to provide you with a comprehensive understanding of 506(c) and 506(b) regulations and how they impact your ability to invest in apartment syndications.

What Are 506(c) and 506(b) Offerings?

In the United States, private securities offerings, such as apartment syndications, are regulated by the SEC under Regulation D. Regulation D contains several rules that issuers (the company or individual offering the securities) must follow when they want to raise capital by selling securities to investors. Two common types of Regulation D offerings are Rule 506(c) and Rule 506(b) offerings.

Rule 506(c) Offerings

Rule 506(c) is a type of private placement offering that allows issuers to publicly advertise their securities offering to potential investors, but only to accredited investors. The issuer must verify that each investor is accredited before accepting their investment. Accreditation can be established through a third-party verification service, or the investor can self-certify their accredited status by providing the issuer with certain financial documentation.

Under SEC rules, an accredited investor is an individual who has an annual income of at least $200,000 (or $300,000 for joint income with a spouse), or has a net worth of at least $1 million, excluding the value of their primary residence. Investors who meet these criteria are presumed to have the financial sophistication to understand the risks associated with private securities offerings and can afford to lose their investment.

Investing in apartment syndications through a Rule 506(c) offering is limited to accredited investors. However, the benefit of investing in a Rule 506(c) offering is that the issuer can publicly advertise the offering to a wider audience, making it easier for investors to find opportunities.

Rule 506(b) Offerings

Rule 506(b) is another type of private placement offering, but it has some differences from Rule 506(c). Unlike Rule 506(c), issuers are not allowed to advertise the securities offering to the general public. Instead, they may offer the securities to up to 35 non-accredited investors who have a pre-existing relationship with the issuer. The issuer must also disclose information about the offering to potential investors. These disclosures are presented in the offering, personal placement memorandum (PPM), and subscription agreements.

The pre-existing relationship requirement means that the issuer must have a prior business or informed relationship with the non-accredited investor that is sufficient to enable the issuer to evaluate the investor’s financial sophistication, net worth, and ability to understand the risks of the investment. This requirement makes it more difficult for non-accredited investors to participate in Rule 506(b) offerings, but it does allow them to invest in private securities offerings if they have a relationship with the issuer.

Investing in apartment syndications through a Rule 506(b) offering is limited to accredited investors and up to 35 non-accredited investors who meet the pre-existing relationship requirement. Issuers may also use the services of a registered broker-dealer to sell securities, as long as they follow the requirements of the broker-dealer exemption.

In summary, while being an accredited investor can make it easier to invest in apartment syndications through a Rule 506(c) offering, it is not always a requirement. Non-accredited investors may also be able to participate in Rule 506(b) offerings if they have a pre-existing relationship with the issuer. A general rule of thumb: if an offering is being advertised publicly it is a 506(c) offering. If the offering is presented only to individuals that have a prior relationship with the one presenting the offering, it is a 506(b) offering and open to non-accredited investors.