Most Delaware Statutory Trust offerings used by 1031 exchange investors are limited to accredited investors, but accredited investor status is not a universal legal requirement for every DST. Who can invest depends on how the specific DST securities offering is structured, the exemption it relies on, and the requirements in its offering documents.
When Is Accredited Investor Status Required?
Many DST interests are offered as private-placement securities under Regulation D. The specific Regulation D exemption matters.
Rule 506(c) offerings may sell securities only to accredited investors. The issuer also must take reasonable steps to verify that each purchaser qualifies as accredited. Simply checking a box stating that you are accredited is not necessarily enough for a Rule 506(c) offering.
Rule 506(b) works differently. An offering may accept an unlimited number of accredited investors and up to 35 non-accredited investors in a 90-calendar-day period. Those non-accredited investors must meet the applicable financial sophistication requirements. However, federal law allowing non-accredited participation does not require a DST sponsor to accept non-accredited investors. An individual offering can still restrict participation to accredited investors.
How Can an Individual Qualify as an Accredited Investor?
The SEC provides several ways for an individual to qualify. The most commonly used financial tests include:
- Net worth greater than $1 million individually or with a spouse or partner, excluding the value of the primary residence.
- Individual income greater than $200,000 in each of the prior two years, with a reasonable expectation of reaching the same level in the current year.
- Joint income greater than $300,000 with a spouse or partner under the same two-year and current-year test.
Accreditation is not limited to those financial thresholds. Certain investment professionals holding qualifying licenses in good standing, including Series 7, Series 65, and Series 82 licenses, may also qualify. Certain directors, executive officers, family-office clients, knowledgeable employees of private funds, trusts, LLCs, partnerships, corporations, and other entities can qualify under separate SEC criteria.
What Other Restrictions Can a DST Have?
Being accredited does not automatically mean an investor can purchase every DST. Each offering may establish additional requirements, including minimum investment amounts, account or entity requirements, sponsor policies, broker-dealer requirements, and other eligibility or suitability standards.
Investors should review the private placement memorandum, subscription agreement, minimum investment, financing structure, fees, risks, and transfer restrictions before making a decision. Our guide to Delaware Statutory Trust risks explains several of the investment issues that should be evaluated separately from accreditation.
DST Eligibility and 1031 Exchange Eligibility Are Different Questions
Accredited investor status relates to securities-offering eligibility. It does not determine whether someone may complete a 1031 exchange.
IRS Revenue Ruling 2004-86 explains when a beneficial interest in the type of DST described in the ruling may be treated as an interest in real property for Section 1031 purposes. The investor and transaction must still satisfy the other applicable 1031 requirements. Our DST 1031 exchange guide explains how those exchange rules fit together.
Likewise, someone who is not accredited is not automatically disqualified from completing a 1031 exchange. The limitation may simply affect which replacement-property offerings are available. Investors who do not meet the accredited investor criteria can review DST options for non-accredited investors and other replacement-property structures.
Check the Specific Offering Before Identifying a DST
Do not assume that every DST has the same eligibility requirements. Before relying on a DST as replacement property, confirm the offering’s accreditation rules, minimum investment, subscription requirements, availability, and timing with the appropriate securities professional. These requirements should be reviewed separately from the tax and exchange requirements handled by your qualified intermediary and tax advisors.