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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
Who can invest in a DST depends on its legal terms and who buys the interest. Many private DST offerings limit sales to accredited investors, a term with several legal tests beyond wealth alone. This guide explains the main tests and the records needed to discuss them with the issuer.
Do not begin with a box that simply asks whether you are accredited. First identify who will own the interest. It might be you, you and a spouse, a trust, an LLC, or another entity. The answer determines which tests may apply and who must sign the documents.
Next, ask the issuer which exemption it uses and which purchasers its terms allow. Rule 506(b) and Rule 506(c) have different conditions. A possibility allowed by a rule is not a promise that a particular issuer will accept that kind of investor. [1]
Rule 501 contains the accredited-investor definition. It lists several categories rather than one universal approval process. Status matters at the time of the sale. Old information may not answer a current question if income, assets, debt, or ownership has changed. [2]
This is a map of the rules, not a determination that you qualify. Ask the issuer's review team and your advisors to apply the relevant category to your facts.
For the individual income test, you need income over $200,000 in each of the two most recent years. You must also reasonably expect to reach that level this year. The joint income test uses over $300,000 with a spouse or spousal equivalent. The same timing conditions apply. “Over” matters: an amount exactly equal to the threshold does not exceed it. [2]
The test looks at each of the two prior years. It does not average them. In a simple fictional example, individual income of $240,000 in one year and $180,000 in the next does not meet the individual two-year income test, even though the average is $210,000.
That person might qualify under a different path, such as net worth or a recognized credential. Failing one test does not necessarily mean failing every category. The point is to use the path that actually fits.
Review the expected current year honestly. A recent retirement, sale of a business, or loss of recurring income can affect the expectation. Do not assume two strong prior years finish the analysis regardless of what you know now.
Ask the reviewer which income records and calculations are appropriate. A gross property sale price is not the same thing as your qualifying annual income.
The common net-worth test is more than $1 million. You can meet it alone or jointly with a spouse or spousal equivalent. Net worth generally concerns assets minus liabilities, but the primary residence is subject to special rules. You cannot just add up what you paid for all you own. [2]
Start with current, supportable asset values and the debts that need to be counted. Identify who owns each asset and avoid counting the same jointly held value twice. For investment real estate, distinguish the property's value from your equity after debt.
For a simplified example, assume countable assets of $1.5 million and countable liabilities of $200,000. Net worth is $1.3 million. That exceeds $1 million. The example does not determine whether every item in a real file is countable or whether its stated value is supported.
A private firm, a closely held asset, or real estate can be hard to value. A bank balance is more clear-cut. An old appraisal or an optimistic estimate may not show the current position. Ask the reviewer what evidence it will use and how uncertainty is handled.
Net worth also differs from cash available to spend. Meeting this test does not show that you can safely commit a large amount to another illiquid investment.
Your primary residence is excluded as an asset in the usual net-worth calculation. That means a valuable home does not by itself supply the qualifying net worth. The related debt rules are more detailed than “ignore the house and mortgage.” [2]
Debt secured by the primary residence, up to its estimated fair market value, is generally excluded as a liability. But debt above that value is counted. There is also a rule for certain increases in home-secured debt during the 60 days before the securities sale, except increases resulting from buying the primary residence.
Two separate fictional examples show the idea. In the first, a primary residence is worth $600,000 and the secured debt is $700,000. The $100,000 excess must be included as a liability under the rule. You do not get to exclude that excess merely because the loan is secured by your home.
In the second, assume a home worth $800,000 has secured debt that rises from $500,000 to $550,000 during the relevant 60 days. If the increase did not result from buying the home, that $50,000 increase must be counted as a liability under the stated rule. This example assumes no other complication.
Do not combine the examples into a shortcut for every refinancing. Give the dates, values, balances, and purpose of the borrowing to the reviewer. New home debt is not a simple way to create net worth just before you buy.
Rule 501 permits specified joint income and net-worth paths with a spouse or spousal equivalent. It defines a spousal equivalent as a cohabitant in a relationship generally equivalent to that of a spouse. A friend, business partner, or any two co-owners are not automatically treated as a qualifying pair. [2]
For joint net worth, the assets need not all be titled jointly. Using the joint net-worth standard also does not require the securities to be purchased jointly. The test and the way you hold title are separate issues.
Still, the records need to support whose assets and liabilities are included. Do not add an asset twice because it appears on two account summaries. Do not leave out a debt merely because only one person manages the monthly payment.
If marital status or the household relationship has changed, raise that issue before the purchase. Ask which path applies now and which prior-year information is relevant. Tell the issuer about a key change. Do not let it rely on a form you know is out of date.
Rule 501 allows professional credentials that the SEC has designated for this purpose, held in good standing. The SEC's current private-placement bulletin identifies Series 7, Series 65, and Series 82 as qualifying credentials. [2] [3]
This route is not a general exception for anyone with professional experience. A real estate license, an MBA, a CPA credential, or years as a landlord do not by themselves fall into that designated-credential path. A person with one of those backgrounds may meet another category, but it should be identified correctly.
Passing an exam in the past also should not be treated as the whole answer. The relevant credential must meet the good-standing requirement. Ask how the issuer checks the current status.
Do not confuse a CPA's potential role in verifying someone else's status with the CPA automatically being accredited. The verification rules name certain professionals who can provide a qualifying confirmation. That is a different subject from the categories that make the investor eligible.
Rule 501 has categories for certain people connected to the issuer, such as specified directors, executive officers, or general partners. These categories are tied to the issuer and the role described in the rule. They are not a general pass for everyone who works in real estate or knows the sponsor. [2]
There is also a knowledgeable-employee category for certain private funds. It should not be stretched into a claim that any knowledgeable person can buy any DST. The kind of issuer, the person's role, and the rule's definition all matter.
These paths show why a short income or net-worth quiz can miss key facts. If you rely on a special category, have the issuer identify it and confirm the facts supporting it.
A review should use the correct rule, not search for a convenient label after the purchase amount has been chosen.
An asset-based path covers some LLCs, corporations, partnerships, and other listed entities. It requires more than $5 million in total assets. The entity must not have been formed just to buy the offered securities. Other categories apply to certain institutions and plans. [2]
Another route covers an entity in which all equity owners are accredited. This is an all-owner test, not a majority-owner test. The rule permits looking through layers of ownership under its conditions. Ownership records can therefore matter as much as the entity's bank balance.
For example, a two-member LLC cannot rely on that all-equity-owner path merely because the member who signs the subscription qualifies. The status of both owners matters for that path. The entity may have another available category, but it must satisfy that category's conditions.
Rule 501 also has a category for certain other entity types owning more than $5 million in investments, with a formation-purpose condition. “Investments” has a defined meaning there. It is not interchangeable with “total assets” in every category.
Ask for an ownership chart, the entity's formation purpose, current financial information, and the authority to make the investment. Those facts help the reviewer choose the correct test instead of treating every entity as a large individual.
One trust path requires more than $5 million in total assets. The trust must not have been formed just to buy the offered securities. A person with the required financial knowledge and experience must direct the purchase. All of those conditions matter for that category. [2]
That does not mean every smaller trust is automatically barred from every path. Nor does it mean a wealthy beneficiary makes any trust eligible. Trust terms, control, ownership, and the available category need a careful review. A revocable trust and an irrevocable trust may present different facts.
Family offices and their family clients have their own paths. The rules set asset and other tests, including who directs the purchase. Calling an LLC a “family office” does not satisfy those conditions by itself.
Certain employee benefit plans have routes based on plan assets, who makes the investment decision, or the status of the people directing a self-directed plan. Do not assume every IRA or retirement account qualifies merely because it is tax-advantaged.
Bring the governing documents and the identity of the decision-maker to the review. Separate securities eligibility from retirement-account tax rules, prohibited-transaction concerns, and the question of whether the custodian will hold the investment. Those are additional subjects for the relevant advisors.
Both exemptions require the issuer to assess status, but the standards differ. Rule 506(b) uses a reasonable-belief standard. The SEC says the facts matter. These include what the issuer knows about the buyer and their prior dealings. [4]
Under 506(c), every purchaser must be accredited, and the issuer must take reasonable steps to verify that status. The rule allows broad promotion when its conditions are met. A public advertisement is therefore not an invitation for everyone who can afford the minimum to invest. [1]
Rule 506(b) can permit a limited number of non-accredited purchasers with the required financial knowledge and experience, subject to its conditions. The current rule caps that group at 35 purchasers in any 90-calendar-day period. Under the counting rules, accredited investors are left out of that count. The issuer also faces other duties when selling to non-accredited investors. [1]
An issuer can choose not to use that allowance. You cannot require admission to a DST simply because you believe you are sophisticated. Ask what the actual offering permits and do not confuse broad securities rules with a promise about current inventory.
Start by naming the category you believe applies and asking what the issuer needs to check it. Under 506(c), listed methods for natural persons include specified income records, net-worth records, and written confirmations from certain professionals. These methods are not the only possible methods, and their details matter. [1]
For example, the listed income method looks at IRS income forms for the two most recent years and a written statement about the current-year expectation. The listed net-worth method uses specified recent records and a statement that all relevant liabilities have been disclosed.
A listed professional-confirmation method can involve a registered broker-dealer, an SEC-registered investment adviser, a qualifying licensed attorney, or a CPA who meets the rule. The confirmation must address the verification and conclusion within the required time. A letter saying only that you are a valued client is not the same thing.
The SEC warns against relying only on a box that a buyer checks. Without other knowledge of the buyer's finances or knowledge, that alone does not meet either standard. Do not treat an online access screen as the completed legal review. [4]
Use a verified secure process for private documents. Ask who receives them, which records are needed, and how long the review is expected to take. Do not send financial statements to an unfamiliar address merely because an email uses a sponsor's logo.
The legal category does not guarantee that an investment is right for you. You may have a high net worth but large near-term cash needs. You may have strong income but little room for a long period without distributions. You may be eligible for far more risk than you want to take.
The SEC warns that private placements can involve limited disclosure, serious loss, and difficulty reselling. An accredited investor remains exposed to those risks. Meeting the test does not mean the SEC approved the offering or that a filing promises safety. [3]
Issuer acceptance and investment capacity are separate, too. The offering may be full, may reject a proposed ownership form, or may need more information. A verification letter is not a reservation.
For an exchange, coordinate this work with the qualified intermediary and tax advisors. The securities review does not extend the tax deadlines or solve an ownership mismatch. Plan early enough to address both tracks without forcing a decision.
Suppose you sent a balance sheet last month. Since then, you took on a large loan or transferred an asset to a child. The old sheet may no longer show your position. Tell the review team about the change before you sign a statement that says the old facts still hold.
The same care applies when the buyer changes. A file reviewed in your own name may not be enough for a new LLC or trust. Do not assume that changing the name on the first page leaves every other answer intact. Ask which records and tests need a fresh look.
Keep one clear record of the path being used. Note the buyer, the category, the records sent, and any open requests. You need not collect every kind of financial record if a sound path calls for only a few. But do not leave out a fact that could change the answer.
This is also a chance to pause. If you can meet a legal test only by tying up money you may need soon, passing the test has not solved the larger problem. Ask whether you can bear a loss, a missed payment, and a long wait to sell. A clean review file is useful; a purchase that fits your life matters more.
It depends on the offering's exemption and terms. Rule 506(c) requires accredited purchasers. Rule 506(b) has a conditional allowance for some sophisticated non-accredited purchasers, but an issuer need not use it. Confirm the actual offering's rules rather than assume every DST follows the same sales policy. [1]
The primary residence is excluded as an asset under the usual individual net-worth test. Home-secured debt has special rules, including debt above the home's value and certain recent borrowing increases. Ask the reviewer to apply those rules instead of simply counting home equity. [2]
No. They are separate possible paths, and other categories exist. You must meet a category that applies to the actual purchaser and offering. If one test does not fit, discuss whether another legitimately does rather than changing answers to force a result.
No. A gross sale price does not equal income or net worth. Debt, expenses, ownership, and the rules for the chosen category matter. A sale can change the financial facts, but the issuer still needs to assess the relevant test at the time of the investment.
Not as a universal rule. The LLC needs its own applicable category. Under the all-equity-owner path, every equity owner must qualify; other routes have different conditions. Give the reviewer the ownership structure and financial facts so it can identify the correct basis. [2]
No. The method, timing, issuer, and current facts matter. Some listed methods use a three-month period. A separate rule can apply for five years after a prior check by the same issuer. Its conditions must be met. Do not assume one letter is a permanent passport to every offering. [1]
No. Advice and purchaser-representative roles can matter in specific settings, but they do not automatically transfer the advisor's status to you. Your own status, or the entity's status, must be evaluated under an applicable category. Ask which rule is being used and why.
Do not misstate your finances or use an ownership structure you do not understand to get around the review. Ask about lawful alternatives that fit your goals and circumstances. An offering's eligibility limit is a reason to consider another path, not a reason to weaken the facts in your file.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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