Does a Delaware Statutory Trust Require Accredited Investor Status?

Posted Sep 25, 2023

Does a Delaware Statutory Trust Require Accredited Investor Status?

DST (Delaware Statutory Trust) investments raised a record $9.2 billion in 2022, but 2023 has seen a decline in the volume of DST offerings due at least in part to rising interest rates. Nonetheless, these investments offer some advantages worth considering. One aspect of DST investing that has enhanced its popularity is the ability of investors to use a DST investment as part of a 1031 exchange, which allows the taxpayer to defer capital gains taxes due on the sale of investment property.

A DST investment can facilitate a custom investment amount, enabling the investor to either completely exchange into passive investing through the 1031 exchange or fill in a required value gap. For investors seeking to transition into passive ownership and still maintain their capital gains deferral, DSTs may offer attractive options.

However, this investment option isn't accessible to everyone who might be interested. Delaware Statutory Trusts (DSTs) are considered private placements, meaning they are only available to accredited investors. Accredited investors are individuals with a net worth of at least $1 million or an annual income of at least $200,000 for the past two years. This is because DSTs are considered to be a more risky investment than publicly traded securities.

Why do some investments require investors to be accredited?

The Securities and Exchange Commission (SEC) distinguishes registered offerings and private placements. A registered offering is one for which the offering company has provided the SEC with significant detail, including financial statements and information about potential concerns, including legal issues. The registration offers a potential investor with sufficient information to make an educated decision about whether to proceed with the investment.

Private placements lack the detailed disclosures and financial statements that registered offerings include. Therefore, the SEC limits access to such options to those who have demonstrated financial sophistication and the ability to sustain potential losses. However, the SEC itself does not offer a designation of accreditation. Instead, the private placement sponsor determines whether each prospective investor meets the requirements. Since a DST requires accreditation, the DST sponsor makes the assessment.

How can I become accredited to invest in a DST?

As noted above, investors with a steady annual income of over $200,000 can be accredited. Another measurement is having assets (not including your residence) of over $1 million. This asset standard can be met using combined marital assets. An investor with lower income or fewer assets can be accredited by having specific credentials, such as Series 7, Series 65, or Series 82 securities licenses that demonstrate financial knowledge. Finally, a "knowledgeable employee" of a company offering a private placement can participate in that company's offerings if approved.

The DST sponsor must verify your accredited status to ensure you are qualified to invest in their private placement. They might use a financial questionnaire, including requesting your financial statements. These requirements do not indicate that the sponsor doubts your word or your financial status. Rather, it’s because the SEC requires that any entity selling to accredited investors must take specific steps to verify the status. Specifically, the sponsor of your targeted DST is following SEC Rule 506(c) to ensure an “objective determination” as to your net worth, income, and asset ownership.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

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