Investments in private markets are rapidly becoming an essential part of a well-rounded investment portfolio, especially for ultra-high-net-worth individuals and families. According to Ernst & Young, the assets under management in private markets more than doubled from $9.7 trillion in 2012 to $22.6 trillion in 2022. This growth is projected to continue, with an estimated $72.6 trillion expected to be transferred to heirs by 2045, marking the largest intergenerational wealth transfer in history.

Given this backdrop, it’s critical for investors to familiarize themselves with the laws and regulations surrounding alternative investments in private securities. In particular, trusts—commonly used as estate planning tools—play a significant role in this arena.

This article is the first part of a three-part series discussing trusts in the context of certain common investor thresholds for investment in private securities. This article will examine trusts as “accredited investors” under the Securities Act of 1933.

Trusts as Investment Vehicles

Many private securities take advantage of Regulation D of the Securities Act of 1933, which allows for the private offering of securities subject to specific requirements. In Regulation D, Rule 506 requires that investors be “accredited investors”—a term that has significant implications for trusts looking to invest in private markets.

How a Trust Can Qualify as an Accredited Investor

A trust can qualify as an accredited investor under the Securities Act of 1933 in three primary scenarios:

1. Trust with Assets Over $5 Million
   A trust may qualify as an accredited investor if it meets the following criteria:
   • The trust has assets of over $5 million.
   • The trust was not specifically formed to acquire the securities offered.
   • A sophisticated individual, who can demonstrate experience and knowledge in financial matters, directs the trust’s investment decisions.

For more information on whether a trust is formed for the purpose of acquiring the securities offered or whether a person is a “sophisticated person,” please visit: SEC Considerations – Investments in Private Securities.

2. Bank-Served Trust
   If a bank serves as the trustee of a trust and makes investment decisions on behalf of the trust, the trust can qualify as an accredited investor, regardless of the trust’s size or other factors.
3. Grantor Trusts: Revocable vs. Irrevocable
   The qualifications for grantor trusts depend on whether the trust is revocable or irrevocable:
   A revocable trust qualifies if:
   • The grantors (the individuals who created the trust) independently meet the criteria to be accredited investors.
   • The grantors are the only beneficiaries of the trust.

There is also a highly fact-specific test for irrevocable grantor trusts to qualify as accredited investors. For more information, please visit: SEC Considerations – Investments in Private Securities.

What This Means for Trust Advisors:

When advising clients about structuring trusts for investment in private securities, an advisor should understand how a trust may qualify as an accredited investor. Structuring a trust to meet these qualifications can be complex. Still, it offers a valuable opportunity for clients to participate in private market investments—especially given the ongoing wealth transfer and growth of private assets.

Careful consideration of these rules and regulations is essential in helping trusts navigate the world of private market investments. With the right planning, trusts can serve as effective tools for both wealth transfer and participation in private securities, enabling clients to grow their assets in a regulated, secure manner.

The increasing prominence of private market investments and the massive wealth transfer underway highlight the importance of understanding the regulatory landscape for trusts looking to invest in private securities. By keeping these guidelines in mind, advisors can ensure that clients’ trust structures are positioned to take advantage of new opportunities in private markets. As the world of private securities continues to expand, staying informed about these regulations will help trust advisors better serve their clients and ensure the long-term success of investments in private securities.