What’s the difference between an accredited investor and a qualified purchaser? Learn more about these two terms in our guide.
Investment Terminology Can Be Confusing
As an investor that’s interested in achieving financial freedom through real estate investing, you’ll likely see a wide variety of new terms that can be quite confusing. Fortunately, a little education and guidance are all that’s needed to understand what these terms really mean and how they can affect your financial future.
Take, for example, the terms “accredited investors” and “sophisticated investor.” What are the similarities? What are the differences? 🤔
In this guide, we are going to break down each of these terms to provide you with a more comprehensive overview of these two types of investors.
What Is An Accredited Investor?
The term “accredited investor” can sound daunting, but you’ll soon discover that the definition is quite easy to grasp. Put simply, an accredited investor is someone (or an entity) who can invest in securities that are not registered with the Securities and Exchange Commission (SEC).
In order to do so, however, there are certain criteria that prospective investors must meet. There are currently five ways that the SEC defines this type of investor. These criteria include:
- The investor is a natural person (legal citizen) who has earned more than $200,000 in income in the past two years and who expects to earn the same or more in the given year ($300,000 or more for married couples).
- The investor is a natural person with an individual net worth or joint net worth of greater than $1 million. The primary residence of the registering individual cannot be included in this net worth calculation.
- The individual has a professional certification, credentials, or designations that allow them to be a part of this group of investors.
- The individual is an employee of a private fund and is considered knowledgeable.
- The individual is an SEC or state-registered investment advisor.
Being an accredited investor allows you to access a wide range of investments that most investors can’t access, such as private funds or hedge funds. Many see being an accredited investor as a major benefit, as you can tap into tools that help you diversify your portfolio and increase your profits.
But how does an accredited investor compare to a qualified purchaser?
What is the difference?
What Is A Sophisticated Investor?
Sophisticated Investor is a loosely defined term of art in both the financial and legal worlds that describes either an individual or an institution with significant market experience, knowledge and financial resources.
This kind of investor is in view in one of two exceptions to Regulation D of Rule 506, the SEC’s registration and disclosure requirement for new securities offerings.
The commission defines a sophisticated investor:
- As an individual or institution that “must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”
- Practically speaking, a sophisticated investor will almost always be wealthy (again, either individually or institutionally). Capital is generally accepted as a stand-in for sophistication, both because it indicates the skill necessary to amass this wealth and because it indicates a higher tolerance for loss.
- However, it is entirely possible for someone with significant experience to have little capital, and vice versa, for someone with substantial wealth to have relatively little market knowledge. Wealth is a good rule of thumb for sophistication, but it is by no means the universal rule.
Whether it’s real estate, traditional investments, or physical commodities, both accredited investor status and sophisticated investor status allow you to invest in some of the high-risk, high-earning investments that other investors are not yet able to access.
With more investments at your disposal (and, hopefully, the knowledge of the risk and rewards that come with them), you can start putting your money into opportunities that yield more profits over the course of your lifetime.
So, What’s The Difference Between An Accredited Investor And A Sophisticated Investor?
One of the most notable differences between an accredited investor and a sophisticated investor is that the threshold for entry is much lower for the former. As an accredited investor, you can receive this status by earning $200,000 per year or having a net worth of at least $1 million.
Beyond this, accredited investors and sophisticated investors both have access to investments that come with higher risk but could earn them far more in the long run.
What Does This Mean For Me?
Aiming to become an accredited investor or sophisticated investor allows you to tap into lucrative investments. The issue? Even if you qualify, diving right into investing so that you can develop financial freedom can be risky. Instead, you should begin looking for real estate resources that can help you make the most of your money.
If you’re ready to invest in real estate and build passive income streams you need to replace your full-time income >>
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