SEC Changes "Accredited Investor" Definition
The Securities and Exchange Commission (SEC) recently made amendments to its regulations, broadening the definition of accredited investors and introducing other changes. Accredited investors have exclusive access to private investment opportunities, which involve fewer disclosure requirements compared to public companies, but also provide less protection for investors.
Previously, accredited investors were determined solely based on financial metrics. Individuals with an annual income of at least $200,000 or assets worth at least $1 million (excluding primary residence) qualified as accredited investors. However, the new rules expand the definition to include individuals with knowledge of financial markets, such as licensed brokers or employees of financial institutions.
The SEC plans to continuously assess and update the credentials and certifications that qualify someone as an Accredited Investor.
Additionally, the amended rules expand the category of entities eligible to participate in private offerings. Any entity with assets above $5 million can now participate, and certain entities like registered investment advisers can participate without any asset requirements. The term "spouse" has been modified to include "spousal equivalent" when defining household income.
These changes concerning individual investors are seen as a positive step towards widening the pool of potential investors in real estate crowdfunding. However, several crowdfunding experts believe that the impact of these changes is relatively limited in scope.
Darren Powderly, co-founder of crowdfunding marketplace CrowdStreet, views the changes as a welcome development, stating that "the SEC has come out in support of the private investment marketplace." Prior to the passage of the JOBS Act in 2012, private investment in commercial real estate was predominantly accessible only to industry insiders, regardless of accredited investor status. However, the advent of the internet and the legalization of crowdfunding under the JOBS Act removed many barriers, though most real estate crowdfunding opportunities still remain exclusive to accredited investors.
Jeff Holzmann, CEO of crowdfunding company IIRR Management Services, does not perceive these changes as significant. Holzmann has advocated for lowering the income threshold to $100,000, which would greatly expand the number of potential investors. He believes that the SEC regulations were designed before the internet made investing more accessible and that technology has changed the landscape significantly.
Adam Kaufman, co-founder and COO of ArborCrowd, agrees that the changes are just an initial step towards inclusivity since they primarily target individuals already in the financial industry. Kaufman emphasizes the need to make investment in commercial real estate (CRE) more accessible and believes that the changes only slightly expand opportunities for those already well-informed about the industry, without drastically increasing inclusivity.
However, Kaufman expects the amendments to have an impact on his business. ArborCrowd often receives inquiries from individuals in the financial and commercial real estate sectors who are not yet eligible to invest in their offerings.
On the other hand, not everyone agrees that broadening the pool of accredited investors is a wise move. The SEC did not modify the income or wealth threshold, which had initially been proposed. The income threshold, established in 1982, has been recommended for adjustment according to inflation by the Brookings Institute. This adjustment would result in a threshold of over $500,000. In 1982, the threshold limited accredited investor status to just 0.53 percent of the population, whereas today, it encompasses 9 percent of the population, as per the Brookings report.
The original intention behind these regulations was to safeguard investors who could not afford to risk their savings with unscrupulous entities. Recent high-profile failures in real estate syndications, such as the collapse of Realty Shares and the failures of Prodigy Network, highlight the risks associated with these investments.
While it is essential to have some protective measures in place, the decision of whether to invest should ultimately be left to the investors themselves. After all, there are no requirements to be an accredited investor when visiting places like Las Vegas, where the odds are often less favorable.
