Is It Fair to Require Wealth for Accredited Investing?

A debate over the definition of an accredited investor is underway ahead of an SEC meeting that could make it tougher to quality. The SEC Chairman is reportedly in favor of making the definition more restrictive, and that’s raising concerns among lawmakers, financial scholars and business startups who feel that opportunities for investing should be expanded, not diminished. (1)   Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.   What is an Accredited Investor?   If you’ve been wanting to invest in a private placement, such as an apartment or storage syndication, but haven’t yet met the requirements of an accredited investor, you may be feeling the frustration. The SEC requires an individual to earn at least $200,000 a year as an individual, $300,000 a year as a couple, or a networth of $1,000,000 or more which excludes the value of a primary residence.   Accredited vs. Sophisticated   The SEC does allow a small number of non-accredited investors in certain private placements - 35 to be exact. And though they may not be accredited, they do have to be "sophisticated."  Investopedia defines a sophisticated investor as someone “with sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” (2)(3) That knowledge or experience would need to be obvious to the private placement sponsor or syndicator. That could include an employee with knowledge about investing opportunities, risks, and the deal itself.   The sophisticated investor designation is allowed in a 506(b) offering under Regulation D - but again only 35 "sophisticated" investors are allowed, and they must have a pre-existing relationship with the sponsor. The Jumpstart Our Business Startups Act, or JOBS Act, of 2012 allowed investors with no prior existing relationship to participate in a private placements for the first time through a new category called 506(c). This allows syndicators and fund managers to market their offerings to the public, but does not allow non-accredited sophisticated investors. Only accredited investors are allowed in a private placement that advertises publicly.   Support for Less Restrictive Definition   At a House hearing on what the SEC is currently planning to do, Committee Chairwoman Rep. Ann Wagner said: “It is no secret that SEC Chairman Gary Gensler’s agenda includes sweeping new regulations in our private markets that would create barriers for investors and entrepreneurs to participate in those markets.”   An article in The DI Wire says notes on the SEC’s agenda show that Gensler plans to change “the accredited investor definition by increasing the annual income and net worth thresholds.” The SEC began soliciting public comments on potential changes last year to “update the rules” and “more effectively promote investor protection.” (4)   Representative Brad Sherman that the current definition doesn’t make sense and needs reform. He says: “That doesn’t mean it should be more restrictive or less restrictive than what we have now, but it should be different.”   Is the Current Accredited Investor Definition Unfair?   Director of Financial Regulation Studies at the Cato Institute, Jennifer Schulp, was more critical. She testified that the accredited investor definition is “unfair” and objected to the idea that the SEC decides “who gets to invest where: public markets for most, but public and private markets for those it judges to be worthy.”   She says: “Such paternalism – limiting how people can invest their money – is objectionable in itself. The SEC should not be charged with protecting individuals from their choices to take certain kinds of financial risk.” She highlighted the fact that in 2010, the SEC “shrank” the pool of accredited investors by adding a clause to the Dodd-Frank Act that excludes the value of a person’s primary home.   Proposed Certification Exam   Chairman of the House Financial Services Committee, Rep. Patrick McHenry, had introduced the Equal Opportunity for All Investors Act. It calls for the SEC to offer an accredited investor certification exam for people with investment knowledge and experience. He said during the hearing that he looks forward to moving ahead with legislative proposals that would improve the accredited investor definition. (5)   Meantime, the SEC rulemaking session is scheduled for April.   You can read more about the evolution of this issue by following links in the show notes at newsforinvestors.com. If you’d like to learn more about the private placement deals that we offer at RealWealth, please go to GrowDevelopments.com. We are currently offering a North Dallas Rental Fund for people who want to leave the landlording and property management to someone else, but would like the financial benefits of owning rental property. However, this deal is only available to accredited investors who fit the current definition. Please hit the join button at the RealWealth home page for access to all our news and data on the U.S. real estate market. And don’t forget to subscribe to the podcast and follow me on instagram @kathyfettke for real estate market updates and commentary.   Thanks for listening!    Links:   1 - https://thediwire.com/house-hearing-debates-changes-to-the-secs-definition-of-accredited-investor/   2 - https://www.investopedia.com/terms/s/sophisticatedinvestor.asp   3 - https://thediwire.com/sec-expands-definition-of-accredited-investor/   4 - https://thediwire.com/sec-signals-changes-to-accredited-investor-definition/   5 - https://www.thinkadvisor.com/2023/02/08/lawmakers-grapple-with-accredited-investor-definition/