Some securities exemptions, such as the Regulation D, Rule 506(b) exemption (and some state securities exemptions), allow investments by a limited number of non-accredited but financially sophisticated investors with whom the syndicator has a pre-existing, substantive relationship. Although the exemption allows this, some syndicators may still restrict their offerings to accredited investors only in order to reduce their liability.
The financial qualifications for investors will be spelled out in the “suitability” section of the Private Placement Memorandum (which is required if non-accredited investors are allowed), so prospective investors should always read this section of the offering documents carefully to make sure they are qualified before investing.
In a Rule 506(b) offering, investors can “self-certify”, so this is where the opportunity for an investor to falsify their qualifications comes in. In a Rule 506(c) offering, investors must provide “reasonable assurance” to the Syndicator that they are accredited,which must be dated within 90 days of the investment. This “verification” should come in the form of a letter from a CPA, registered investment adviser, or an attorney (someone with a license) signed by the professional, certifying that they have reviewed the investor’s financial information within the past 90 days and found them to be accredited. There are services that provide this; in fact we offer Accredited Investor Verification through an affiliate (click on the “Get Verified” tab in the website navigation bar).
Accredited Investors should beware of “fudging” their qualifications. It’s surprising how many people say they’re accredited to get into a deal (when they are not) and then complain later that they weren’t qualified and shouldn’t have been allowed to invest when the deal fails. Syndication offering documents may require the investor to indemnify the Syndicator if they lie about their qualifications and it causes liability for the Syndicator later (ours do), so there could be repercussions against investors in those cases. I know of a regulatory action involving a Syndicator where this very issue was raised. In that case, the Syndicator was absolved because they were able to show that the investor was sophisticated as they had attended numerous training programs on the subject of Syndication prior to investing.
The flip side of this is that a Syndicator may think it’s OK to allow someone to say they’re accredited, even though the Syndicator has knowledge they are not. In this case, the liability lies with both parties. I know this happens, as I have seen it. In that case, we were able to get the investor’s money back as they never should have been allowed in the deal in the first place and the Syndicator was in clear violation of securities laws for letting them in their deal. FYI — there is no indemnification and no limited liability for violations of securities laws — so if you do something like this as a Syndicator, you could become personally liable for that investor’s losses if your deal fails, as well as regulatory penalties or prosecution. It’s simply not worth the risk.
Bottom line, investors need to be as truthful about their qualifications as they expect the Syndicator to be about the deal, and don’t invest if you can’t afford to lose the money. And Syndicators should carefully review the Subscription Agreements of their investors and deny admission to any whom they have reason to believe don’t meet the qualifications required by the securities exemption the Syndicator has selected for a deal.
FAQs
Repercussions for lying about being an accredited investor
In many jurisdictions, non-accredited investors are given by law a right of rescission — sometimes in perpetuity. This means that the non-accredited investor has a right to undo the investment transaction and get their money back — maybe years later.
Is it illegal to lie about being an accredited investor? ›
There is no penalty for lying that you are an accredited investor.
What happens if you say you are an accredited investor? ›
An accredited investor is one who meets certain criteria regarding income, net worth, and qualifications. They are wealthy individuals who are allowed access to investments that many people are not allowed.
What happens if unaccredited investor invests? ›
Non-accredited investors are limited by the SEC from some investment opportunities for their own financial safety. The SEC also set regulations on the disclosure and documentation of the investments available to the investors. For example, non-accredited investors are eligible to invest in mutual funds.
What happens if you lie to a customer? ›
You lose credibility and trust with the customer. It can give you a bad reputation as an individual. It can reflect poorly on your company's reputation. Unless you own the company, it could cost you your job.
Is defrauding investors a crime? ›
It's a federal crime to defraud anyone in connection with a security or commodity - or obtain money or property from purchasing or selling a security - by using false or fraudulent pretenses, representations, or promises.
What crime is lying to investors? ›
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information.
What happens if a company lies to investors? ›
In some cases, investors can take you to civil court because of their losses. Other times, their claims about your conduct could lead to a federal investigation and investment fraud charges. Recognizing potentially risky business practices can help you avoid white-collar criminal charges.
How do you get around the accredited investor rule? ›
How to invest without being an accredited investor requires only that the investor has a net worth of less than $1 million. This includes the net worth of his or her spouse. The investor must also have earned $200,000 or more annually for the last two years.
Does 401k count for accredited investor? ›
Generally, if you are the trustee of your Solo 401k and your combined assets (Solo 401k plus personal assets) meet the $1 million threshold, both you and the Solo 401k should qualify as accredited investors.
To qualify as an accredited investor, you must have over $1 million in net worth, or more than $200,000 in earned income in the past two calendar years, with the expectation of the same earnings. Financial professionals with Series 7, 65 or 82 licenses also qualify.
What is the income test for accredited investor? ›
Income. Has an annual income of at least $200,000, or $300,000 if combined with a spouse's income. This level of income should be sustained from year to year.
Can non-accredited investors invest in syndication? ›
There are a wide array of real estate syndications out there. Many are open to accredited investors only, due to SEC regulations. However, there are some opportunities open to non-accredited investors as well.
Do you need to be an accredited investor to invest in syndication? ›
Most opportunities are only available exclusively to accredited investors for various reasons, such as being able to market/solicit the specific deal opportunity through a 506 (c) offering.
What are the blue sky laws? ›
Blue sky laws are state-level, anti-fraud regulations that require issuers of securities to be registered and to disclose details of their offerings. Blue sky laws create liability for issuers, allowing legal authorities and investors to bring action against them for failing to live up to the laws' provisions.
How do you prove a qualified purchaser? ›
Qualified Purchaser Requirements
To qualify as a qualified purchaser, you must have an investment portfolio worth at least $5 million or a combined portfolio of $25 million between yourself and other qualified investors.
Do you have to be a qualified purchaser? ›
Individuals & married couples
An individual or married couple is a qualified purchaser if they have $5 million or more in investments or joint investments, excluding their primary residence or business property.
How do you determine if you are a qualified purchaser? ›
In the simplest terms, qualified purchaser status is afforded a person or a family business holding an investment portfolio with a value of $5 million or more.
Can you be a qualified purchaser and not an accredited investor? ›
Accredited investors are individuals or entities who are qualified by the SEC to invest in unregulated or sophisticated securities, while a qualified purchaser is an individual or entity with an investment portfolio worth over $5 million.
