Accredited Investor?? WHY!!

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Accredited Investor?? WHY!!

Ryan Taylor
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
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. 

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    4y
    Quote from @Nicholas Misch:

    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. 

     

    @Nicholas Misch, In principle I agree with you. However someone who buys a $100k car in cash almost certainly can buy these investments. So, a $30k car is a more appropriate example.

    Also, lets be fair. These aren't products with "the best terms". They are products with the higher risk with more potential reward AND where the minimum investment is substantial for someone of modest means.

    Before the regulations go away we need to do away with social welfare programs in my opinion. Then people can start to be responsible for themselves more. 

    0Reply
  • Nicholas MischPro Member
    Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
    4y
    Quote from @Kevin Sobilo:
    Quote from @Nicholas Misch:

    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. 

     

    @Nicholas Misch, In principle I agree with you. However someone who buys a $100k car in cash almost certainly can buy these investments. So, a $30k car is a more appropriate example.

    Also, lets be fair. These aren't products with "the best terms". They are products with the higher risk with more potential reward AND where the minimum investment is substantial for someone of modest means.

    Before the regulations go away we need to do away with social welfare programs in my opinion. Then people can start to be responsible for themselves more. 

    I guess that fact that you changed the example from a $100k car to a $30k car does not change my perspective that its MY money my choice and not the governments business. Also what you and I consider the "best terms" is relative. I consider high risk high reward the best terms for me. 

    We can agree on the need for removal of some "social welfare" programs, however I hardly think it should have anything to do with my ability to put my hard earned and saved money where ever I darn well please. 
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  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    interpretation # 1: The govt. is trying to protect consumers from rapacious capitalists with inside knowledge, expertise and resources from profting off of vulnerable and under informed people

    interpretation # 2: the system is "rigged against the little guy"

    both are correct.

    5Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    @Brian Garlington echoed my solution 15 years ago- take the Series 65 exam and pay the annual fees. The exam gives you part of the legal knowledge, you practice by fire, which may burn money. Failure is the best teacher. Once you have enough income or cash stop filing the annual fees. 

    1Reply
  • Nicholas MischPro Member
    Investor · Broadview Hts, OH · Member since 2016 · 310 posts · 280 votes
    4y
    Quote from @Brock Mogensen:

    I agree that the rule is pretty absurd.  But there are plenty of syndication offerings out there that allow for unaccredited investors as well.


     I have yet to see one. Please give me details if you come across one. 

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    4y

    Here is my best attempt at explaining this… An accredited investor is a defined by the United States Securities & Exchange Commission as someone who makes a minimum of $200,000 ($300,000 if filing jointly) or has a net worth of 1 million dollars excluding personal residence. The significance of being an accredited investor is that you can invest in things that those with less money, cannot. You can also be something called "a sophisticated investor" which has a much more nebulous definition but essentially says you know what you are doing even if you don't have that much money. These laws were put in place long ago to "protect" the average person from predatory activity. The irony of this all is that there is no protection for the average Joe, or pension funds for that matter, against investing in a wildly bloated stock market at record valuations. Every major trader out there knows we are in a bubble but there is no protection for individuals dumping money into their retirement accounts to buy mutual funds. It's an archaic system which makes little sense. Certainly, there has been some recognition of this fact. The 2012 JOBS act made it easier for Main Street America to participate in "alternative" investments via crowdfunding and made it easier for sponsors to advertise previously unknown opportunities. However, we have a long way to go. I would advise you that you need to know the lead syndicator personally. None of this "we met at a local REIA and he pitched me his deal". If a guy does not have a list of solid investors they must lack the track record.

    2Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    4y
    Quote from @Ryan Taylor:
    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 


     Thats because Wall Street is a far bigger lobbyist than apartment syndicators!!

    1Reply
  • Allan Smith
    Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    If you form Partnerships with people who can put your money to work the SEC does not need to be involved. The money partner just has to be more active in the business so that is not a security being managed on behalf of the money partner. It could be something like you doing the accounting.

    now for the real-world advice, I know many, many people who raise money from investors for their deals without having any SEC filing or verifying that their investors are accredited. I mean, think about it, if you borrow money from your uncle so you can flip a house, you sold the security. How many times do you think those people are filing with the SEC? 


    Just Network your way to actively investing professionals to offer capital for them to put to work . There are many of them out there .

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Ryan Taylor

    As others mentioned- companies can register with the SEC to raise funds from non accredited advisors. In last five years Reg A+ was introduced which allows for both accredited and non accredited - there are also REIT's to invest in

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  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    4y

    I for one want to read @Mike Dymski original post, but I also like unpopular answers, so that puts me in the minority. 

    My wholly uneducated opinion on the matter falls mainly in the camp of no incentive exists for politicians to change the rules. 

    Most of our securities regulations have their basis in the 40'Act and that came in response to the wild west days of speculation, Jesse Livermore and the like. Uncle Sam stepped in response to ills, real and perceived, that came about during the depression. One of the things that Reg D does in creating the concept of an accredited investor is to lessen the regulatory and reporting requirements for securities. In overly simplistic terms less oversight means more deals get done but with a higher change of shenagines on the part of sponsors. By limiting the investor base to "accredited" the potential damage occurs to people who are already rich. Well the damage is limited if you buy off on the idea that more money equals more financially sophistication.  By keeping the damage to "rich" ppl the politicians have hedged their bets bc when some nefarious actor comes alone with a scam syndication and walks off with all the LP's cash, the headline risk is low. Most voters simply won't care about someone making 4x the median wage/ a millionaire losing some their shirt. In fact a non trivial amount will get some form of schadenfreude from it. 

    Now if anyone could invest in syndications, it would take about a year before someone put all their family's savings into some can't miss deal run by a shady Clayton Morris like character and they the investment goes to zero. Hell it could be on of the honest as the day is long operators that we see on BP here all the time who spent 15 yrs running grocery stores, paid $40k to take a mastermind class on syndication, raised some money in $10k chunks, felt the cash drag pressure and got into a deal where the only way things penciled is if cap rates went from 4 to 2.5 in five years when the fed funds rate at purchase was ever so slightly above zero. [If that fact pattern seems oddly specific to be made up, you just answered your own question] 

    The WaPo/ Pro Publica would have B reel of Mom, Dad, Wally and Beaver getting kick to the curb/ living in a hotel. Cut to an interview with the husband about how all he wanted to do was make a better life for his family and he trusted the dream our Clayton stand in sold and now he has nothing. The only ppl who care about that scene more than voters are the politicians. That's the type of thing their nightmares are made of. 

    If you've made it this far, remember OP asked for the logic of why we have the rules. No one said anything about the logic being good... 

    This issue also has a Hobbesian component to it, but I think that plays a smaller role

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    4y

    Ok, I'll bite but I can't say it much better than @Bill F.  I'm thankful there are limited regulation offerings available.  If all offerings required public company disclosures and audited financial statements, it would be cost prohibitive and we would not have many private market opportunities.

    Regardless, private offerings are the wild wild west and we all see problematic offerings all the time with misaligned interests, aggressive underwriting, insufficient disclosure, risky debt structures, unreasonable sponsor compensation, shady tactics, problematic legal arrangements buried in 100+ page private placement memorandums, sponsors who don't pass appropriate background checks, and even well-intended sponsors who lack the experience or business acumen to be managing peoples' savings.  Someone losing $100k of their $150k in lifetime retirement savings on a bad operator or simply unlucky market timing is a lot different and becomes a societal problem compared to someone else losing $100k of millions in savings.

    The SEC does not control our net worth and income...we control that ourselves, but that's not going to be a popular answer in Victim-america.  I don't have much energy around the rules or what they should be...I just focus on what I can control and go after it hard.

    1Reply
  • Joe Archbold
    Investor · Batavia, IL · Member since 2014 · 99 posts · 81 votes
    4y

    There is alot of details here and to not get too far into the why, here some detail from FINRA regarding private placements and Reg-D 

    Firm Guidance – Private Placement Filings | FINRA.org

    Regulation D lets companies doing specific types of private placements raise capital without needing to register the securities with the SEC. The cost to register with the SEC would make most offerings even more expensive and less accessible. And although they don't have to register they do have to file their PPM and be compliant to the rules.

      1Reply
    • Bill F.
      Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
      4y

      @Mike Dymski

      100% agree. As much as we'd all love it if Atlas Shrugged became reality, the sad truth of the matter is if Reg D went away, Private Placements wouldn't suddenly open up to the mass, they would go away entirely. That hurts everyone, including non accredited investors. 

      Mike's second paragraph perfectly encapsulates my thoughts on the state of RE syndications todays. That should be required reading for sponsors and would be investors. 

      I honestly believe that 5-7 years ago there were probably around ~25-50 MF sponsors in the lower middle market MF area that achieved above average returns that justified the risk of investing in syndication. Now the number of sponsors in that space have gone up 5-10x but there are still only 25-50 worth investing in.

      His last paragraph is advice we all need to heed. Focus on things you can control and let the rest go. 

      1Reply
    • Paul MoorePro Member
      Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
      4y
      Quote from @Brock Mogensen:

      I agree that the rule is pretty absurd.  But there are plenty of syndication offerings out there that allow for unaccredited investors as well.

      Hi @Brock Mogensen I get this question a lot. Our fund only allows accredited investors but I like to have a place to send people. Can you tell me any places you recommend? 

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    • Brock Mogensen
      Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
      4y
      Quote from @Paul Moore:
      Quote from @Brock Mogensen:

      I agree that the rule is pretty absurd.  But there are plenty of syndication offerings out there that allow for unaccredited investors as well.

      Hi @Brock Mogensen I get this question a lot. Our fund only allows accredited investors but I like to have a place to send people. Can you tell me any places you recommend? 

      I'm happy to build a relationship and talk deals with any folks that want to learn more.  


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    • Frank Greg
      Lender · rate.bid · Member since 2022 · 324 posts · 62 votes
      4y
      @Ryan Taylor

      Hoping someone can provide some logic to the SEC reasoning behind having to be "accredited investor" to invest in certain security offerings.

      You may be surprised but if you have ever looked through the list of SEC enforcement actions, prosecutions, securities fraud related cases, you'd be shocked to find out that there are infact, very dangerous and sophisticated criminals out there who device all sorts of schemes to swindle unsuspecting investors out of hard earned cash.

      Since some investors often dip into life savings and retirement accounts to make some of these investments... the SEC's agenda from a regulatory standpoint is to ensure that the investor has a certain level of sophistication necessary to independently evaluate investment opportunities, know what they are getting into and can afford to take the hit in the event that the investment results in a sour outcome.

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