Financial Poise
alternative assets

Alternative Assets and the “Average” Accredited Investor Installment #1

Who Is This Series For?

This series of articles is written for the average “accredited investor.”

An “accredited investor” is a legal term that refers to anyone (a) whose net worth, either alone or with a spouse, exceeds $1 million (not including the positive equity in her or his primary residence); or (b) who has earned more than $200,000 (or $300,000 with a spouse) for the past two years and reasonably expects to earn more than $200,000 (or $300,000 with a spouse) in the current year.

What do we mean by the “average” accredited investor? We mean the vast majority of accredited investors who earn less than $5 million dollars a year and who are worth less than $25 million. These are not hard numbers by any means, but are rough guides. Our thinking is that if you meet these minimums, you are probably already aware of the things this series would otherwise tell you or that you are well advised by the right professionals.

In other words, this series is not for the ultra-affluent. If you are blessed to have a “family office” to manage your money; if your family was once featured on Lifestyles of the Rich and Famous, if you have never flown commercial: this series is not for you.

Nor is this series for start-ups, the entrepreneurs behind them, or their advisors. There are plenty of resources for these groups- literally hundreds of “accelerators,” scores of podcasts, dozens of excellent magazines and websites.

Finally, this series is neither for the would-be speculator or active trader who is interested in trading options, futures, or commodities, nor for the gambler-fad monger who is thinking about the next “hot” thing (i.e., most cryptocurrencies) to invest in to make a quick buck.

What’s the Significance of Being an Accredited Investor?

In a nutshell, accredited investors are able to participate in certain alternative investment opportunities that are not otherwise available to non-accredited investors. Examples include: private equity, venture capital, angel investments, hedge funds, and private placements, all of which are considered “alternative assets.”

Essentially, an alternative investment is anything that you wouldn’t hear a financial advisor at a bank steer a client toward.

In our Financial Poise Glossary, we define an “Alternative Investment” as one that doesn’t fall under the categories that are considered to be traditional – stocks, bonds and cash. They tend to have long investment horizons and to be complex in nature, and are less regulated and are not as liquid as traditional investments.

Alternative investments include antiques, precious metals, rare stamps, coins, sports cards and other collectibles, in addition to private shares in startups, commodity pools, over-the-counter contracts and so on. Essentially, an alternative investment is anything that you wouldn’t hear a financial advisor at a bank steer a client toward. These investments are not considered mainstream and, as such, are not easily managed as part of a traditional investment portfolio.

What Is the Purpose of This Series?

Our purpose is to introduce you to the private markets for alternative investment opportunities (that is, alternative assets) that are available to accredited investors and to educate you about how they operate. Our goal is not to try to sell you on any particular investment or investment class.

You most likely already have traditional investments in the stock market (whether by direct ownership or by owning shares of mutual funds), bonds, and/or real estate. Our basic mission is to provide you with objective and reliable information that you can use to decide for yourself if you should diversify into the brave new world of “alternative assets” and, if the answer is yes, to help you so you can do so on an informed basis.

alternative assets

Why Now?

Until recently the federal securities laws prohibited the advertising of accredited investment opportunities. Most accredited investors were consequently completely in the dark about them. This changed as a result of the Jumpstart Our Business Startups Act (or “JOBS Act” for short), signed into law on April 5, 2012.

Under the JOBS Act, entrepreneurs, companies, private equity and venture capital funds, hedge funds and others are now able to advertise investment opportunities and solicit investments from accredited investors. The JOBS Act is also the law that legalizes equity crowdfunding.

Because of the JOBS Act, accredited investors are going to learn more and more about the existence of the world of alternative assets. No longer will this world be confined to those who read The Wall Street Journal cover to cover each day.

It has been said that a little bit of knowledge is a dangerous thing, however, and the coverage the mass media will afford will not be enough to educate you on whether alternatives are for you.

Rather, you are going to hear about it on television shows like Today and Good Morning America, on your morning talk radio station, or through banner ads while browsing Facebook® or your favorite website. This is a good thing, since the opportunity to diversify into alternative assets offers accredited investors the potential for greater overall investment returns and smart diversification.

It has been said that a little bit of knowledge is a dangerous thing, however, and the coverage the mass media will afford will not be enough to educate you on whether alternatives are for you. This series will.

We also hope to serve as a counterbalance to a proliferation of information sources that appear on the surface to be objective but are anything but. When looking at a website, for example, ask yourself these questions:

  • Are the articles by-lined? In other words, is it clear who the writer is? If not, stay away.
  • Are biographies of the writers on the website? If not, stay away.
  • Does the website accept advertising or paid content from participants in the investment field? If yes, stay away.

If the answer to any of these questions is “yes,” then consider how its objectivity is possibly impacted.

[Editor’s note: You may be interested in the following webinars: Options for the Accredited Investor and The JOBS Act, a Retrospective and a Look Ahead 2018.]

Read More

While we encourage you to read this series in order, you certainly don’t need to. Each installment is designed so it can be read as a stand-alone article.  Here they are in case you want to skip around:

Who are ‘We’?

Alternative Investment Guide

You will notice that throughout this series, I use the term “we.” This is done to acknowledge the great editorial assistance of the Financial Poise Editorial Team. This series is based on my book The Investor’s Guide to Alternative Assets: The JOBS Act, “Accredited” Investing, and You.

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About Jonathan Friedland

Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts…

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