Accredited Investor?? WHY!!

Private Lending & Conventional Mortgage Advice

Accredited Investor?? WHY!!

Member since 2022 · 88 posts · 38 votes

Hoping someone can provide some logic to the SEC reasoning behind having to be "accredited investor" to invest in certain security offerings. Any other ways around this. Wanting to get into apartment syndication, and maybe you dont have to be accredited for this, but I have a couple of short term first trust deeds notes ready to ballon and want to redeploy my capitol. Any advice and guidance is greatly appreciated.

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Kevin Sobilo

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

@Ryan Taylor, I am by no means an expert on the subject but I'll throw in my 2 cents.

I think the reason behind the SEC rules on accredited investors is that they don't want people who can't afford to lose money to invest in these kinds of investments. Also people who would not meet the accreditation criteria are often not financially sophisticated enough to evaluate these kinds of offerings.

The offerings often have a minimum amount that for people who have a lower net worth would mean a substantial part of their investment/savings would be in a single investment that they may not understand well enough. All their eggs in one basket proverbially speaking.

I don't think the net worth excluding primary residence equity of $1 million is that high. Many many people with real estate holdings or a healthy 401k will meet that. So, it isn't shutting everyone out.

From what I understand, one way around it is to know the people doing the syndication. If it is a family member or friend, I believe you can invest even though you don't meed the accreditation requirement.

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
4y
@Ryan Taylor, I am by no means an expert on the subject but I'll throw in my 2 cents.

I think the reason behind the SEC rules on accredited investors is that they don't want people who can't afford to lose money to invest in these kinds of investments. Also people who would not meet the accreditation criteria are often not financially sophisticated enough to evaluate these kinds of offerings.
The offerings often have a minimum amount that for people who have a lower net worth would mean a substantial part of their investment/savings would be in a single investment that they may not understand well enough. All their eggs in one basket proverbially speaking.

I don't think the net worth excluding primary residence equity of $1 million is that high. Many many people with real estate holdings or a healthy 401k will meet that. So, it isn't shutting everyone out.

From what I understand, one way around it is to know the people doing the syndication. If it is a family member or friend, I believe you can invest even though you don't meed the accreditation requirement.
8 Reply
Paul Crosby II
Lender · Columbus · Member since 2020 · 61 posts · 103 votes
4y
Hi Ryan,

@Kevin Sobilo is absolutely correct as this was created to protect retail investors who dont have the reserves.

There are tons of syndication companies out there like Fundrise and the like. A simpler method for you would be partner with another investor or someone that has assets to be consider accredited on a deal so you can borrow their assets and they can benefit from your liquidity.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y
Any company can take any investors money if they so want to. But in order to do so, those companies need to register and make regulatory filings with the SEC. If a company refuses to make the appropriate filings and register, then they are limited in whose money they can to only accredited investors. So remember, every single one of these companies could take your money...but they are choosing not to, (while usually shifting that blame onto someone else)
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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
4y
@Ryan Taylor

It's the government's way to try and protect investors from losing money or getting tied up in illiquid assets... but they allow you to invest in gamestop. Kind of silly but it's likely a large contributing factor to the growing wealth gap.

The SEC recently expanded the definition of an accredited investor. Look for other ways you coul qualify.

There are also vehicles such as a regulation A and a 506(b) offering that allow non-accredited investors.

At the end of the day, you need to vet and make sure you're partnering with the right group that you would trust with your hard-earned capital.

Good luck!
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
4y
REITs are a practical workaround, FYI.
To pick a random REIT that you can buy individual shares of stocks in, consider NLY.
Has paid out $0.22 to $0.30 per share, per quarter, for some time. Each share sells for $6.27.
$0.22 * 4 / $6.27 = 14% ROI just on the dividend. That's your cashflow from rent, more or less. "Cash on cash return on investment."
And if those shares happen to go up in value, that would be additional profit on the back end when you sell your shares, analogous to selling a rental property after it's gone up in value. It also may go down in value, and indeed it is currently trending down.
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Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Andrew Hogan:

@Ryan Taylor

It's the government's way to try and protect investors from losing money or getting tied up in illiquid assets... but they allow you to invest in gamestop. Kind of silly but it's likely a large contributing factor to the growing wealth gap.

The SEC recently expanded the definition of an accredited investor. Look for other ways you coul qualify.

There are also vehicles such as a regulation A and a 506(b) offering that allow non-accredited investors.

At the end of the day, you need to vet and make sure you're partnering with the right group that you would trust with your hard-earned capital.

Good luck!
My exact thoughts (about Gamestop) and the stock market in general. Dont have to be accredited to throw your money out the wi dow there...or drop the mortgage payment on the slots in Vegas...but the"Government" who we all know excels at losing money, wants to protect investors from losing money...lol...got it
Find a way I guess...sure cant beat em
Thank you for your reply...much appreciated
2 Reply
Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
4y
SEC, (as in mine government) does not want a person one year out of college with student loans on their back, a job at $50000 and no savings maximizing their credit cards to invest. An accredited investor filed IRS returns past 2 years with $200,000. of income or $300000 if married. Or they can have one million dollars in liquid $$$
I had a Series 7 and Series 65 in the long ago. I could act on behalf as one.
There are lots of shared equity fintech sites that popped up in past year, many let you invest as if they are a REIT or buying one share of a property. Many make claims of 77 percent returns which is preposterous and fake.
I advise: NEVER invest your parent or grandparent's money unless they can lose it just like playing roulette. Losing your brother's hard earned cash ruins a family relationship. The general partner can steal everything.
End of rant.
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Andrew HoganPro Member
Rental Property Investor · Indianapolis, IN · Member since 2016 · 559 posts · 463 votes
4y
@Chris Mason the downside there is that REITS are just another form of paper or stock and doesn't have any tax advantages... unless of course you lose money lol
2 Reply
Edwin Epperson
Lender · Tampa, FL · Member since 2020 · 202 posts · 116 votes
4y
@Ryan Taylor I feel your pain. I struggled with wondering why all the "sexy" and sophisticated offerings were always to accredited investors. But that's only because of the filing type. I personally have filed for Reg D 506(c) and (b) offerings for real estate investment funds as well as other asset funds. The key is to network. Every now and then you may find a syndicator who is wanting to raise capital from "family and friends" and goes with a Reg D 506(b) offering. This offering can hinder many large funds but can be very beneficial for the fund manager/syndicator if they have a large network. One of the disadvantages of filing a Reg D 506(b) is the no public solicitation rule. However because the SEC requires the fund manager/syndicator to personally know the investors, they cna have up to 35 non-accredited investors and an "unlimited" number of accredited investors. I "quote" unlimited because actually there is a limit of 2000 but you would be hard-pressed to find a fund that manages 2000 individual investors unless it's a Reg CF, Reg A, or Reg A+ fund. As I mentioned identify fund managers/syndicators get to know them, and let them know where you stand as far as investible cash, you never know when they may have something they are looking to create and may offer you a seat in one of the 35 non-accredited spots.
RLTW/ DOL - Edwin
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
4y
Quote from @Andrew Hogan:

@Chris Mason the downside there is that REITS are just another form of paper or stock and doesn't have any tax advantages... unless of course you lose money lol

You also aren't going to randomly google "best house for sale" and find one that cashflows at a 14% CoC ROI at the tippy top of google, but I did indeed just google "best publicly traded REIT" and found precisely that. I'm guessing if we did a deep enough analysis, we'd find that markets find equilibrium, making it a ballpark wash.

I finally found some decent quality academic research on FSBO v Realtor/MLS. "Shocker," the FSBOs sell for a bit less, and an even bigger "shocker" is that it's almost exactly a wash with realtor commissions. Markets find equilibrium. It's a total wash, on average (FWIW I still list with a realtor, simply because they could knock out in 30m - at no additional cost to me - what would take me a few hours).

The advantage of a specific syndication is the same as the advantage of a specific investment house purchase. You can do a decent amount of work to find a syndication that you believe is likely to outperform the market, and you can also do work to invest in individual houses and achieve above average performance. And that's the same thing with FSBO v Realtor, if you're going to do the work to be the best FSBO ever, you will have above average performance, and if you pick a rockstar realtor, you will have above average performance there too. The cat is skinned either way. If congress passes some tax cut for something over here, or increases taxes over there, the prices will adjust to reflect, as markets find equilibrium.
4 Reply
Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
4y
Keep it simple....pass the Series 65 exam and keep it moving.
5 Reply
Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Brian Garlington:

Keep it simple....pass the Series 65 exam and keep it moving.

Lol...I like the way you think. With muti-fam properties and a self storage facility...you sir are someone I would like to know.
2 Reply
Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
4y
Quote from @Russell Brazil:

Any company can take any investors money if they so want to. But in order to do so, those companies need to register and make regulatory filings with the SEC. If a company refuses to make the appropriate filings and register, then they are limited in whose money they can to only accredited investors. So remember, every single one of these companies could take your money...but they are choosing not to, (while usually shifting that blame onto someone else)

But that type of compliance costs a lot, and drives the profits from the owners/investors to the attorneys and accountants in the deal.
There is a sweet spot for making money without doing that...
It like saying Walmart has stores all over the globe, but Bob's hardware only has one store in your hometown...
Bob isn't WalMart...That's a whole different level.
0 Reply
Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
4y
Quote from @Ryan Taylor:

Quote from @Brian Garlington:

Keep it simple....pass the Series 65 exam and keep it moving.

Lol...I like the way you think. With muti-fam properties and a self storage facility...you sir are someone I would like to know.

Looks like you may have served or are serving our country. If so,....Big Ups and Thank You.
0 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y
0 Reply
Chris John
Member since 2020 · 671 posts · 937 votes
4y
@Mike Dymski
Not gonna lie, Mike. Normally I find your posts a lot more illuminating! haha
4 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
4y
Quote from @Chris John:

@Mike Dymski
Not gonna lie, Mike. Normally I find your posts a lot more illuminating! haha

Ha, my draft reply sounded like I was too full of myself and I was too lazy to edit it. This is a subject where the real answers are all unpopular.
4 Reply
Ryan Pulice
Accountant · Northern Virginia · Member since 2018 · 15 posts · 8 votes
4y
@Ryan Taylor, the government hates most people
1 Reply
Mark S.
Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes
4y
@Chris Mason Just an FYI - I don’t believe NLY owns actual real estate, but is more on the lending side. And there is a reason the yield is 14%.
0 Reply
Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Brian Garlington:

Quote from @Ryan Taylor:

Quote from @Brian Garlington:

Keep it simple....pass the Series 65 exam and keep it moving.

Lol...I like the way you think. With muti-fam properties and a self storage facility...you sir are someone I would like to know.

Looks like you may have served or are serving our country. If so,....Big Ups and Thank You.

Brian, I unfortunately did not get to serve. So all I can do is admire and pay respects to those that do/did.
0 Reply
Ryan Taylor
OP
Member since 2022 · 88 posts · 38 votes
4y
Quote from @Ryan Pulice:

@Ryan Taylor, the government hates most people

True statement
0 Reply
Alex Talcott
Attorney · Durham, NH · Member since 2019 · 292 posts · 126 votes
4y
It does seem to be a it-takes-money-to-make-money / haves-and-have-nots reinforcing cards-stacked-against kind of thing.
One public policy reason is the pernicious historical prejudice of literacy tests for voting rights. It's a very imperfect alternative, with the objective of consumer protection.
1 Reply
Nicholas MischPro Member
Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
4y
DUMBEST "protection" ever! This one really fires me up! So I can go drop $100k+ cash for a car right this very moment, but I can't invest it in certain products (often with the best terms) because I'm just a dummy and have to be protected. If I had the very rare fortitude to save $100k (only 15% of Americans have $100k or more in savings) then I should be able to invest it any way I see fit. This is nothing other then financial discrimination. Sorry, rant over.
1 Reply
Nicholas MischPro Member
Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
4y
Quote from @Alex Talcott:

It does seem to be a it-takes-money-to-make-money / haves-and-have-nots reinforcing cards-stacked-against kind of thing.
One public policy reason is the pernicious historical prejudice of literacy tests for voting rights. It's a very imperfect alternative, with the objective of consumer protection.

EXACTLY!
0 Reply
Brock Mogensen
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
4y
I agree that the rule is pretty absurd. But there are plenty of syndication offerings out there that allow for unaccredited investors as well.
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