In our conversations with accredited investors, we often hear frustration with the lack of clarity about how to become an accredited investor in Canada.
More specifically, investors wish they had known sooner that there isn’t a formal accreditation process at all—despite what the name suggests. To qualify, individuals simply need to meet a certain income or asset criteria and they’re immediately qualified to invest in high-reward asset classes – like institutional-quality real estate – that are unavailable to the rest of the population.
In this article, we cover everything to do with being accredited investor in Canada as well as the lucrative opportunities available exclusively to those who meet said wealth criteria.
Table of contents
01.
What is an accredited investor in Canada?
An accredited investor is an individual, entity, or financial institution with a special financial status that enables them to invest in opportunities that are not available to the public market.
In Canada, the official definition of an accredited investor has 22 categories, and includes a list of investors such as large financial institutions and government agencies who we will not address in this post. Our focus instead is on the criteria that individuals and entities need to meet in order to qualify as accredited investors.
Individuals
Individuals are considered accredited investors in Canada as long as they meet any of the following net worth or asset criteria:
- An individual who has a before tax income of over $200,000 for at least two years in a row ($300,000 if combining income with a spouse) and expects to exceed that income the current calendar year
- An individual, alone or with a spouse, who has net assets of more than $5 million
- An individual who, either alone or with a spouse, beneficially owns aggregate financial assets of more than $1,000,000, before taxes but net of any related liabilities
- A person registered in Canada, under securities legislation, as a dealer or an adviser
Entities
Some companies are able to fund sophisticated investment vehicles and are also qualified as accredited investors as long as they meet the recommended guidelines which can be any of the following:
- A trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act
- A pension fund that is governed by the Office of the Superintendent of Financial Institutions, a pension commission or related regulatory authority of a jurisdiction of Canada
- A registered charity under the Income Tax Act that has obtained advice from an eligibility adviser or an adviser registered under the securities legislation of the jurisdiction of the registered charity to give advice on the securities being traded
- An investment fund that is advised by a person registered as an adviser or a person that is exempt from registration as an adviser.
- A trust established by an accredited investor for the benefit of the accredited investor’s family members of which a majority of the trustees are accredited investors
02.
How to become an accredited investor in Canada
There is a common misconception that a process exists for an individual to become an accredited investor—this isn’t the case. No government agency or independent body reviews an investor's credentials, and no certification exam or piece of paper exists that states a person has become an accredited investor. You simply need to meet the income or net worth criteria outlined in the section above.
Do you have to prove you’re an accredited investor?
In short, the burden of proving that you are an accredited investor in Canada does not fall on you but rather the investment vehicle you choose to invest in.
While it’s necessary for an individual to meet certain wealth guidelines to be an accredited investor, no federal agency or regulatory board verifies that you have met said criteria or issues permits or licenses certifying your status as an accredited investor.
Rather, the investment vehicle—such as a fund, start-up, or online platform you choose to invest in—has to confirm your status as an accredited investor by doing their due diligence prior to the sale of any assets. At a minimum, you’ll be expected to provide documentation such as financial statements, credit reports, or tax returns, to prove your income and/or net worth.
03.
What is the difference between accredited and non-accredited investors?
A non-accredited investor (also known as a “retail investor”) refers to investors who don’t meet the net worth or income requirements defined above. The options available for non-accredited investors are significantly more limited than those available to accredited investors as a way to protect them from investing in areas that they don’t understand well or taking a risk they can’t afford.
On the other hand, accredited investors’ high net worth and financial knowledge allows them to afford larger potential losses and make riskier investment choices. While these opportunities may come with higher risks, they also come with much higher returns.
The key difference between accredited investors and non-accredited investors is that accredited investors are allowed to invest in private markets whereas retail investors are not. Let’s unpack what this means.
Private Market vs Public Market
Put simply, public markets are financial markets where stocks and bonds are traded on public exchanges, while private markets are financial markets where investments are not traded on public exchanges. Here’s a quick overview of the differences between private and public markets:
- Private markets are typically more risky because they’re not regulated by any governing body whereas public markets (e.g. Canadian financial markets and stock exchanges) are regulated by a number of provincial and territorial securities commissions.
- Private markets have less competition and lower capacity but higher returns. For example, it’s easier to find a great real estate opportunity in the private market than it is to find a good stock opportunity that’s been combed over by the whole world.
- Public markets are more liquid, which means that investors can more easily sell their stake in a company, whereas private markets often see capital locked in for a longer period of time.
- Public markets are more directly affected by the economic climate whereas many asset types in private markets are not.
04.
Benefits of being an accredited investor
Due to their considerable income or savings, accredited investors have more opportunities to build their wealth through lucrative private market investments that are unavailable to retail investors. In other words, while anyone can go out and buy stocks and bonds, certain high-risk, high-reward opportunities are only available for purchase to those who meet specific financial qualifications.
Plus, since accredited investors can invest in both public and private markets, they can more easily diversify their portfolio and mitigate risk associated with any individual asset class. Here’s a quick summary of the pros and cons of being an accredited investor:
05.
Investment opportunities for accredited investors in Canada
Perhaps you’ve realized you qualify as an accredited investor or maybe you’re simply curious about what these unique accredited investment opportunities look like. In this section, we take a closer look at three popular ways Canadian accredited investors can invest their money—and build their wealth:
Venture Capital
Venture capital is a form of equity financing through which investors provide funding for promising startups and early-stage private companies in exchange for a share of company ownership. As companies grow and appreciate in value, investors’ return on their investment grows commensurate with the amount of their investment.
There’s no doubt about it: venture capital is the big-business engine of our time. Venture capital backed giants like Google, Amazon, and Facebook before any of them turned a profit. And while the prospect of hunting for the next unicorn is exciting, only 10% of startups will be profitable. What’s more, investors generally cannot get their money out until the startup enters the public market or is acquired by another public company. In the best case scenario, that’s many years of never seeing any returns. In the worst case scenario—and the most likely scenario—this could mean your investment seeing zero return.
All that said, venture capital is a particularly appealing investment vehicle for people who want to play a material role in a business they’re passionate about without managing the day-to-day operations, and where they can flex their deep expertise in both entrepreneurship and investment banking.
Hedge Funds
If you’re looking to adopt a more aggressive investment strategy, hedge funds could be right for you. Like exchange traded funds (ETFs) and mutual funds, hedge funds are professionally managed by career investors, but they’re subject to less regulation and scrutiny. As a result, they’re allowed to use riskier and more complex investment strategies that are not allowed for EFTs and mutual funds. Generally speaking, the more risk you take the more you stand to make (or lose), so while hedge funds can be complex, they also provide accredited investors with gainful opportunities.
Keep in mind, because managers are in charge of making the buying and selling decisions for a fund, hedge funds have significantly higher fees. The most common fee arrangement for hedge fund managers is known as “2 and 20,” wherein a hedge fund manager annually takes 2 percent of all managed funds, regardless of their performance, and then also gives themselves a 20 percent performance fee taken from investors’ annual gains. A hedge fund lives or dies by its manager, so you'll want to find someone who you trust, who has a good reputation, and who's running a portfolio that holds investments you're comfortable with.
A final consideration is that hedge funds don’t offer the choice of immediate liquidity. As an investor, you often have to commit to keeping your money locked up for a certain period of time, and managers always have the right to limit withdrawals.
Real Estate
There are many ways to invest in real estate. Unfortunately, most investors overlook real estate because they think it requires a large amount of capital upfront. And while that may be true for some traditional methods of investing, like flipping a house or developing a commercial property, there are many alternative opportunities to invest in real estate that are available to accredited investors. Real estate syndication, private equity real estate, and online real estate investing platforms are three particularly interesting options.
Real estate syndication is when accredited investors can team up and combine their capital and resources to buy an apartment complex, strip mall or larger holding that would be too expensive to purchase on their own. The benefit of syndication is that investors can choose the projects they want to invest in. The downside however, is that they have to actively source high-quality projects and fellow investors, which can be extremely laborious.
Private equity real estate on the other hand operates like a mutual fund, whereby you would invest in a professionally managed fund that focuses on varying real estate projects. The benefit is that it’s professionally managed, but could be less exciting for accredited investors who want to be in the driver’s seat.
But by far one of the most appealing options for newly accredited investors to explore are online real estate investing platforms: they allow for fractional ownership of high-quality real estate projects that were historically only available to institutional investors, while also giving investors the option to choose which projects they want to invest in.
06.
Benefits of investing in real estate in Canada
The benefits of investing in real estate are numerous. With well-chosen projects, investors can enjoy predictable cash flow, steady returns, tax advantages, and diversification. Not to mention, investors can leverage real estate to further build wealth. Here’s a quick overview of the benefits of investing in real estate:
- Steady returns and predictable cash flow.
Whether you invest in commercial real estate or residential, you can rent out your space to tenants and then receive monthly income in the form of rent. The ability to generate passive income this way frees up time for you to focus on other areas of your business—all while continuing to build wealth and improving your cash flow.
- A hedge against inflation.
Real estate is an asset class that maintains a steady holding over time and is less susceptible to fluctuations in the market. That is, long-term property prices generally trend upward. Historically, as inflation rises, so do property values, as well as rent prices on investment properties. For this reason, real estate income is one of the best ways to hedge an investment portfolio against inflation.
- A diversified portfolio.
Investing in real estate is one of the best ways to diversify your investment portfolio. Real estate has a low correlation with many of the other major asset classes, including the stock market, which means adding it to your investment portfolio can help lower its volatility, especially during economic downturns.
07.
Parvis: Real estate investing designed for Canadian accredited investors
Even if you’re just dipping your toes in the world of real estate investing, it’s easy to get started with Parvis. Thanks to an innovative digital platform, an expert team, and a strong network of developers and builders, Parvis is able to match you with high-quality real estate projects.
And while real estate is typically known as an illiquid investment asset, Parvis is leveraging blockchain technology to enable investors to buy and sell their position in a real estate investment like stocks on an exchange. Our goal is to maximize your returns—all while keeping performance fees low.
To summarize, these are the benefits of investing with Parvis:
- Expert team & deep network:
Our team has extensive real estate, finance and legal expertise, with a depth of knowledge and experience when it comes to completing capital stacks for development projects both in Canada and internationally. - High-quality investment opportunities:
Because of our accredited investor base and deep network with quality developers, builders, and financial institutions, we attract high-caliber projects. - Access to previously restricted deal flow:
Direct deal investing gives our investors the opportunity to flex more control over their real estate opportunities. - Uncapped investments:
Unlike real estate crowdfunding—which is available to everybody, including non-accredited investors—offerings on Parvis have higher buy-ins and no caps on investments. This helps assure developers that they will be able to fill the fund for larger, higher-quality developments much more reliably than real estate crowdfunding can offer. - Transparent & Low Fees:
All target returns are posted net of fees, and the fees kept as low as possible. For you, that means reasonable fees and a clear vision of the returns for a particular investment. - Liquidity options:
We use blockchain technology to enable investors to buy and sell their position in a real estate investment like stocks on an exchange, via our secondary market.
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