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Accredited investor status
Old 06-29-2020, 05:21 PM   #1
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Accredited investor status

Let's say you have $1M in cash, and no other assets. You just barely qualify for accredited investor status. If you invest 600K in a private equity investment (that requires accredited status), and then use the remaining 400k to buy a house (primary residence), is that okay and legal? Your net worth is now only 600k from an accredited investor perspective because it doesn't count your primary residence. Can you continue holding the private equity investment?
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Old 06-29-2020, 05:27 PM   #2
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Legal - not sure
smart - probably not
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Old 06-29-2020, 05:32 PM   #3
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Sounds like a bad idea from an investing point of view. From a rules point of view I have been accredited for maybe 30 years and have bought into a number of deals. For each one there was a form that I filled out, essentially self-certifying that I exceeded the thresholds for NW, income, etc. From that point I never heard anything. I think it is on the promoter to follow the rules and he is there to sell the deal, so he doesn't care.
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Old 06-29-2020, 05:38 PM   #4
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Yeah I'm not saying it's a good idea, just curious if it's legal. This is not for myself but for a friend.
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Old 06-29-2020, 06:02 PM   #5
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From what I know (and that might not be much), once you buy the security you own it... just losing your accredited investor status does not mean you lose (or have to sell) your security...


But, you cannot buy any more as you are no longer accredited.




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Status as the time of investment is what is important: at the time the accredited investor affidavit or accredited investor verification document (if general solicitation was used) was signed, and when the round was closed.
If they became non-accredited after they made the commitment and verification but before the round closed, that becomes an interesting question. I presume they could re-neg on their commitment; but whether you should re-neg is a question for your attorney.
If they become non-accredited after the round was closed, I presume they may lose their pro-rata participation rights, which doesn't seem fair to the investor.
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Old 06-29-2020, 06:48 PM   #6
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Thank you!
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Old 06-29-2020, 10:57 PM   #7
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Quote:
Originally Posted by readytofire View Post
Yeah I'm not saying it's a good idea, just curious if it's legal. This is not for myself but for a friend.
Your friend will probably lose his money...
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Old 06-30-2020, 06:29 AM   #8
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And as a result he should no invest any more than he can afford to lose.
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Old 06-30-2020, 08:56 AM   #9
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Accredited Investor status is only relevant at the time the investment in a private placement is made. If you subsequently lose that status you can keep the investment but cannot make additional investments.
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Old 06-30-2020, 09:35 AM   #10
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Here is how I think it works:

Due to characteristics of the offering, risk, disclosures, etc. SEC rules require the promoter to offer to accredited investors only. Accredited investors are, in theory, more sophisticated investors and better able to accept risk. The promoter features this requirment in the offering circular and anyone applying to buy part of the deal must fill out an accredited investor qualification form, which is also attached to the offering. The promoter basically takes the investor's word that he/she is qualified.

Down the road, if the SEC somehow finds out that the promoter is selling to investors who are not accredited, the promoter could be in hot water. I'm not sure how the SEC could discover this fact, though.

Down the road, if the investor is unhappy with the deal, I guess he could argue that he/she was not actually accredited and that he/she had lied to the promoter. It's hard for me to see how this kind of complaint could go very far.

As I said above, in doing maybe 5-10 deals I simply filled out the form asserting that I was accredited and never heard another thing. No one asked for any kind of proof. There is nothing preventing the promoter from asking for backup, I suppose, but he is in the business of attracting investors not repelling them. So it is not in his interest to be fussy about this.

A couple of things from my history, though: First, I only did small local deals where I had some personal confidence in the principals. I believe that any national deal that comes with salespeople, colored brochures, etc. to be prima facie stinky. No one would screw around selling nationally to retail investors if the deal was good enough that heavy hitters and institutional investors would buy it. Also, the paperwork for a national deal might be different; I wouldn't know because I have never had any interest in them.

The other thing from my history is that I never made a private investment that was more than a single-digit percentage of our net worth. If I went back and checked, probably none were over 5%. For us little guys I think the goal should be base hits, not home runs.

From the OP's question I am concerned first that his friend is considering putting a crazy percentage of his/her net worth into a very risky deal. Second, my guess is that this is a stinky national deal where some salesperson has convinced the friend that the deal is wonderful. Novice investors are particularly vulnerable to buying castles in the sky, something Ben Graham warned us about more than a half century ago.
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Old 06-30-2020, 09:46 AM   #11
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Accreditation is a hurdle to stop sellers of risky investments to prey upon the uninformed community. Other than that, it is buyer beware because usually such investments are impossible to assess from a financial viewpoint.

A Heloc on your home would enable you to regain that status very quickly if you have locked into a gravy train of risky investments.

I have made several accredited investments and they are generally risky, and the ones that pay off can be 10-baggers to offset the total losses. Overall it is exciting, although the losses can eat you up. OTOH, the total losses are tax write offs giving you some satisfaction. Doing just one requires you to be abnormally lucky.i
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Old 06-30-2020, 01:33 PM   #12
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I have both made private placement investments as an accredited investor and have worked for companies that sell investments through private placements that require accredited investors.

An investor needs to be accredited when they sign the paperwork saying they are accredited. The seller is not required to get any further proof. The seller needs that paperwork to prove they only sold to accredited investors.

If the investor wasn't really accredited or loses accredited status, it doesn't affect their status as an investor in the deal that was done. If the investment goes bad and they complain later that they aren't accredited, it won't have any bearing on the investment and the seller will point to the paperwork where the investor claimed they were accredited at the time the sale was made.

Hopefully that answers the OP's question, but like others have said - the friend should not make this investment if they are only accredited because they haven't bought a house yet. A heloc would be a debt on the residence and could not be used towards accredited status.
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Old 06-30-2020, 03:16 PM   #13
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Thank you all for the helpful answers.
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