Investors would do well to understand Rule 501(a) of Regulation D, particularly those seeking to engage in the private securities market. To that end, the following decodes the rule and provides what investors should know.
Rule 501(a) of Regulation D of the Securities Act of 1933 defines how an individual or entity can qualify as an accredited investor, which is required to buy some unregistered securities.
Following the stock market crash of 1929, Congress passed the Securities Act to help protect investors from fraud, deceit, and misrepresentation in the sale of stocks, bonds, and other securities.
There are advantages of this regulation for companies, the main ones being:
The rule is part of Regulation D of the federal legislation that defines the qualifications for being an accredited investor – in other words, those who may invest in unregistered securities.
Because there are not as many disclosure requirements for unregistered securities relative to registered offerings, unregistered securities are generally riskier investments but with potential for higher returns.
Accredited investors is a classification defined by the U.S. Securities and Exchange Commission (SEC) in Rule 501(a) of the Act of ’33. Such investors – primarily high-net-worth individuals – invest in private companies, commonly startups. For such companies, it is prohibitively costly to register the securities they wish to sell. So, they raise funds by selling securities to qualified investors.
So that more people and entities can qualify as an accredited investor, the SEC in 2020 revised the accredited investor qualifications while maintaining the law’s original intention to shield investors from prospectively risky investments.
For individual investors, modifications recognize that a person can be capable of understanding an investment’s potential risks, even if they do not have a high net worth or income. Here are the accredited investor requirements, with revisions:
For entities, the update added a number of new categories of eligibility for accredited investors:
The rule does affect securities offerings:
To verify eligibility for participating in private-capital markets, accredited investors may be required to submit documents including tax returns, financial statements, tax assessments, their credit report, or brokerage statements.
Accredited investors have a broad range of opportunities in which to participate, including alternative investments. Such private-market offerings — including real estate, real estate investment trusts, and venture capital — can protect against volatility and inflation, due to their low correlation to public markets.
Yieldstreet, the leading alternative investment platform, offers these opportunities and more. In fact, it has the broadest selection of alternative assets – those other than stocks and bonds – of any other platform. To date, $4 billion has been invested with Yieldstreet, with a 9.6% IRR.
Such opportunities serve another crucial purpose – investment diversification. Crafting holdings comprised of varying assets can mitigate overall risk and even improve returns. In fact, portfolio diversification is key to long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Rule 501(a) is important in private investing and is valuable in broadening investment opportunities. Its 2020 update expands qualifications and reduces barriers to access to such investment opportunities, which include alternative investments.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.