From the desk:Syndications: LP (Capital Provider)

What does "accredited" actually require and does income from LP deals count toward it

Syndication LP investing keeps coming up in what I read, and I keep running into the accreditation requirement without understanding it well enough to know if I clear it.

What I think I know: there's an income test and a net worth test, and your primary residence doesn't count in net worth. My situation is that my income is a bit under the threshold I've seen quoted, and my net worth is mostly home equity plus retirement accounts.

The specific thing in front of me: a sponsor I've been following sent out a deal and the subscription documents ask me to self-certify accredited status. I don't want to check a box I'm not entitled to check. I also don't understand who verifies it or what happens if I'm wrong.

Second question I've been sitting on. If I invest through a self-directed IRA, whose accreditation is being tested, mine or the account's? And does the retirement balance count as net worth for the test?

Happy to be told this is a question for a professional. Mostly want to understand the mechanism before I pay someone to explain it.

Answer

0renee_dubois Get yours

The specific dollar thresholds and how the tests apply to a retirement account are a securities question, and you want a securities attorney or the sponsor's investor relations person to walk you through it in writing.

What I can tell you from being on the receiving end of subscription documents. Self-certification is common in some offerings and third party verification is required in others, and the difference depends on how the sponsor structured their raise. When verification is required you'll typically be asked for tax returns, a brokerage statement, or a letter from a CPA or attorney. Nobody at the sponsor is going to eyeball your finances and guess.

Don't check the box if you aren't sure. Call the sponsor and ask which exemption they're using and what documentation they need. They answer that question ten times a raise.

5 replies

1tashaford30PB2APRO7

I asked a sponsor this exact thing last spring and their investor relations person spent twenty minutes on the phone with me for free. They'd rather sort it out before you subscribe than after.

1aliyah_bAU2APRO6

The self-directed IRA question is the one I'd get real advice on before anything else. There's a whole separate set of rules about what a retirement account can invest in and what counts as a prohibited transaction, and it interacts with debt-financed income in ways that surprised me when a CPA explained it. Not something to work out from forum posts.

On the mechanism side, @anchor, the piece that helped me was realizing the sponsor is the one with the obligation here, not you. They have to have a reasonable basis for believing their investors qualify. So the pressure to get it right sits on their side, which is why they'll happily tell you what they need.

1nicole_adeyemiPassivePRO5

One thing worth adding. Even once you clear the test, the money you put into an LP position is illiquid for the whole hold, typically five to seven years, and there's usually no way to get out early. Some agreements let you request a transfer subject to sponsor consent, and consent isn't guaranteed.

So the question that matters more than accreditation is whether you can leave that money alone for six years while it possibly pays you nothing for the first two. If your net worth is mostly home equity and retirement accounts, ask yourself what's actually available to commit.

2megan_doyle15 Get yours

Reading this thread I realize I'd assumed accredited just meant "has money". Didn't know there were two separate tests.