Does a Delaware Statutory Trust Require Accredited Investor Status?

Does a Delaware Statutory Trust Require Accredited Investor Status?

Posted by Clay Schmidt on Feb 6, 2021


We’ve written a great deal about Delaware Statutory Trusts (DSTs), what they are, their benefits, and how to defer capital gains taxes by launching a 1031 exchange into them.

While there are a great many advantages involved with DSTs, investing in one isn’t something you just go and do. With any kind of private placement or investment -- such as placing funds, or exchanging into a DST -- you must have accredited investor status.

What is an Accredited Investor?

An accredited investor is an individual or entity that has obtained permission to invest in securities that aren’t registered with the Securities and Exchange Commission (SEC). Publicly traded stocks or bonds do not require accredited-investor status. Interval and hedge funds, private equity funds, some types of crowdfunding, and asset-backed investments (such as DSTs) do.

Becoming an accredited investor requires the following:

  • A single income greater than $200,000, or joint income, with a spouse, greater than $300,000, over the past two years. You also must be reasonably sure of the same income level(s) in the current year.
  • An individual net worth, or joint net worth with a spouse, that exceeds $1 million, excluding the value of your primary residence, at the time of the investment.
  • Receipt of certificates, designations, or credentials, such as Series 7, Series 65, and Series 82 licenses.
  • Being a "knowledgeable employee" of a private fund.

How to become one

Even if you meet one or more of the above requirements, you don’t automatically become a designated accredited investor. Nor can you take a test or receive certification. In fact, there isn’t an agency or independent body that supports or awards investor accreditation. Rather, it’s up to the company that issues securities (or in the case of a DST, trust shares), to determine your accredited investor status. Much as you conduct due diligence before making investment decisions, those companies and trusts are conducting their own due diligence on you.

For instance, if you are interested in a particular DST, the sponsor might give you a questionnaire to determine your financial status. That questionnaire could also require financial statements and other accounts to verify your assets and cash flow. Requests for tax returns and other proof of wages, along with credit checks, are also not out of the question. Finally, some sponsors might require letters from your CPA, tax attorney, or financial advisor to determine your net worth.

The above isn’t because the DST sponsor doesn’t trust you or your word. Rather, it’s because the SEC requires that any entity selling to accredited investors must take certain 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.

Is accredited investor status right for you?

The short answer to the above is, if you are interested in DST participation, then yes. You must have an accredited investor status to do so. Additionally, being an accredited investor potentially provides you with access to additional investment opportunities that could provide higher rates of return, as well as potentially assisting with portfolio diversification.

However, these potential investments can also carry a higher degree of risk than publicly traded stocks, municipal bonds, or certificates of deposits. They also tend to require longer-term holds and a higher degree of illiquidity. Initial investments can be quite high. Finally, private offerings for accredited investors aren’t registered with, or regulated by, the SEC. This puts more onus for researching any offerings on you, the investor. 

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.

There is no guarantee that the investment objectives of any particular program will be achieved.

The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time.

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