Alternative Investments for Accredited Investors: An Educational Guide

Alternative investments is a broad label for assets and strategies that differ from publicly traded stocks, bonds and cash. Common categories include private equity, venture capital, private credit, real estate, infrastructure and real assets, and hedge fund strategies. Many are offered through a private fund, which pools money from multiple investors under a manager's strategy.

Many private fund offerings are limited to accredited investors because they are not registered in the way public securities are. Under SEC Rule 501(a), an individual may qualify with income over $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the two most recent years with the same expected this year, or with a net worth over $1 million, excluding the primary residence. The August 2020 amendments also added people holding certain licenses in good standing (Series 7, Series 65 or Series 82), and knowledgeable employees of the fund in certain private funds. Entities and family offices with over $5 million in investments or assets can qualify, as can registered investment advisers and exempt reporting advisers, among other categories listed in the rule.

Offerings are usually made under Rule 506(b) or Rule 506(c). Under 506(b), the issuer may not use general solicitation. Under 506(c), general solicitation is allowed, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status. Either way, any offering is made only by the issuer through its own offering documents, and nothing on this page is an offer or solicitation.

Traditionally, investors have used alternatives as one part of a broader plan alongside public stocks and bonds. Some people are drawn to them for diversification or for access to areas of the economy that public markets do not reach. Others find the complexity or limited access not a fit for them, and that is a reasonable conclusion too.

Private funds usually operate differently from mutual funds or exchange-traded funds. Interests are often held for multi-year periods, with limited or no ability to redeem early, and capital may be called or returned over time. Investors have typically reviewed offering documents, such as a private placement memorandum and subscription agreement, with their own licensed advisers.

Tax reporting can also look different. Many private funds issue a Schedule K-1 rather than a 1099, which can arrive later than other tax forms. Certain company stock may be discussed in connection with Section 1202 (QSBS), which has specific eligibility rules. Tax treatment depends on individual circumstances, so people typically consult their own tax professionals.

The right fund manager may help you understand how a strategy works, what it is designed to do, and what risks come with it. A good conversation is generally educational: the manager explains the approach, the type of assets involved, and how the fund is structured, without pressuring you toward a decision.

Questions people often bring include: What is the strategy and how does it make decisions? What are the fees and how are they charged? How long might my money be committed, and what are the limits on withdrawing? How is the fund valued and how often do I receive reports? What is the manager's experience, and what could go wrong?

You may also want to ask which exemption the offering relies on, what accredited investor verification looks like, and what tax documents to expect. Take your time, read the offering documents, and review everything with your own licensed attorney, tax professional and financial adviser before deciding anything.