The Introduction Series #3: Who Can Invest in Alternative Investments?

Who Can Invest in Alternative Investments?

Part 3 in a Series by Denis Shapiro

 

Making an alternative investment was once considered a “country club transaction” because it required you to have connections and pre-existing relationships with what was sometimes an elite group of sponsors. But the JOBS (Jumpstart Our Business Startups) Act of 2012 dramatically changed the alternative investment world, opening it up to all private individuals that meet the SEC’s standards for being an “accredited investor”. These are the same deals that used to be exclusively benchmarked for family offices, private equity firms, and institutional investors; the only “catch” is that you have to be accredited to take advantage of all available offerings.

 

This is the definition of an accredited investor, according to the U.S. Securities & Exchange Commission (SEC):

An accredited investor, in the context of a natural person, includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). 

There are other categories of accredited investors, including the following, which may be relevant to you:

  • any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticatedperson, or
  • any entity in which all of the equity owners are accredited investors.

There are exceptions for individual deals, especially if you have a preexisting relationship with a sponsor, but these rules are in place to protect the investor from unscrupulous characters trying to take advantage of someone who can’t afford to lose money or doesn’t know any better. The SEC has added additional requirements since 2012; the best place to look up current requirements is www.investor.gov.

 

Why Your Financial Advisor Said Alternative Investments Weren’t a Good Fit for You

 

Financial advisors often steer clear of alternative investments for one reason: It’s easier. Traditional assets are considered less risky by the advisor community and have built-in scapegoats with so many different analysts involved.

Also, many advisors have a set list of approved products offered to their clients, which don’t typically include alternative assets. Finally, there is sometimes a stigma associated with alternative assets since more cases of Ponzi scams occur in this realm.

 

I’ve met two types of advisors: One that looks at the pros and says, “This might be a good fit for my clients even if I don’t make commissions or asset under management fees.” However, they usually don’t have the proficiency to evaluate individual deals so they advise their clients to do their own research. In those situations, the advisor works with their clients on portfolio allocation. The second, which is sadly more common, is an advisor who looks at an alternative investment as competition and sees lost revenue from missed fees. In this case, they will adamantly steer their clients away from alternative investments-causing a lot of potentially great opportunities to be missed.

 

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my bookThe Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways

[1] “Updated Investor Bulletin: Accredited Investors.” Updated Investor Bulletin: Accredited Investors | Investor.gov, 31 Jan. 2019, www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-3.

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.

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