This is Heuristics - where assumptions and short-cuts are called out and broken down so that you can invest with greater clarity.
Are you an Accredited Investor?
If so, you have certainly had to check the box to access many private real estate syndications.
How did this make you feel?
Special? Part of a secret club? Smart? Entitled?
Like a monkey with a knife?
What Exactly is an Accredited Investor?
Certainly sounds fancy. With such an appellation, one must certainly have some special skills or knowledge.
But what did you DO to get this special title that gives you access to restricted investment opportunities? Take a course? A test?
None of these?
The History of Accredited Investors
The term was coined in 1982, and was intended to apply to the top 2% of households. The purpose was to prevent people from facing irrecoverable financial hardship as a result of making bad investments.
Definition of “Accredited Investor”
An Accredited Investor is a person or entity that the SEC allows to invest in private, unregistered securities (like startups, hedge funds, or private equity). Since these investments don't have the same rigorous disclosure rules as public stocks, the SEC uses this status to ensure the investor has enough "financial sophistication" or wealth to handle the risk.
There are three ways to qualify:
Income: >$200,000 (single) or >$300,000 (married) for both of the past two years.
-or-
Net Worth: >$1M (excluding primary residence).
-or-
Expertise: Series 7, Series 65, and Series 82.
The Accredited Investor Today
Note that the static “Accredited Investor” definition of 1982 has completely lost its intent of limiting access to the top 2% of households, as shown in the table below.
Nearly 20% of households now qualify as accredited. This has effectively expanded access to private offerings from the ultra-wealthy to the working rich.
The Take-Away
Being awarded accredited status is an accomplishment that may be well-earned. Having income or wealth at any of the levels mentioned is no small task.
However, the human brain can be easily misled to believe that access to private investments means they have the skills and knowledge necessary to navigate the complexity of such investments. But this is completely false and highly dangerous.
Money ≠ Skill
So take accredited for what it is: a pass to accessing the most complex and potentially high-risk investments available. It’s a responsibility, not an entitlement.