Any way to get around being "Accredited Investor?"

12 Replies

Hi,

I am looking to invest in Real Estate Crowdfunding websites like Realtyshares, Peerstreet, and others.

Almost all of these require me to be "Accredited Investor" with $200K+ income or $1M+ net-worth. I do not have either of those at the moment. 

Is there a way to get around this requirement to get started on investing in RealtyShares as an example?

Much appreciate your responses and feedback.

Thanks!

@Neel Shah

No. This is part of rule 501 of regulation D from the Securities and Exchange Commission.

$1 million dollars in net worth, excluding the primary residence, or have an income of $200,000 plus (or joint with spouse of $300,000 plus) for two consecutive years with expectation to do it again the following year.

This is a long standing rule to keep investors out of trouble for large projects like investing in Malls and Golf courses and non-registered securities.

@Neel Shah , No you can't get around it. However there are 3 sites that currently offer investments nationally that don't require being accredited. Rich Uncles, FundRise and RealtyMogul. There are pluses and minuses to the different sites. So I did an in-depth article analyzing them which might be helpful to you. BP doesn't allow me to post a link, so if you're interested do a Google search on "the real estate crowdfunding review nonaccredited options part 1" and you'll find it.

It is true there is no legal way to get around being accredited. Note there are two different real estate crowdfunding platforms. 506c and 506b. 506c platforms (RealCrowd & CrowdStreet) have to take responsible means to determine that you are accredited. They make you prove it. However, the 506b platforms (ifunding, Realty Shares and Realty Mogul) let investors self certify. Check a box and your accredited.

There is a price to pay for investing with 506b platforms. They are not very transparent and most won't even let you publicly discuss investments that are already funded. They also charge higher fees to investors.

@Neel Shah.  You can invest into a syndication directly.  I am a real estate developer and I put together Reg D 506 (d) syndications.  I can accept up to 35 non-accredited investors who are considered "sophisticated." 

PM me if your interested into looking at a proforma.  I'm based in Burlington VT, not too far from Billerica...

If the issuer is using the 506(b) exemption you don't need to be accredited.  The issuer can take up to 35 non-accredited (sophisticated) investors into the offering if they CHOOSE to do so.  Most issuers won't because of the extra brain damage.  

Reg. A+ offerings (Title IV) and Title III offerings also allow for non-accredited investors. We'll be offering both types of these offerings later in 2017.

You're either accredited or you aren't.  If you aren't you have fewer investment options because the issuer has more liability and cost by marketing their securities to you if you aren't accredited.  

Originally posted by @Mark Robertson :

It is true there is no legal way to get around being accredited. Note there are two different real estate crowdfunding platforms. 506c and 506b. 506c platforms (RealCrowd & CrowdStreet) have to take responsible means to determine that you are accredited. They make you prove it. However, the 506b platforms (ifunding, Realty Shares and Realty Mogul) let investors self certify. Check a box and your accredited.

There is a price to pay for investing with 506b platforms. They are not very transparent and most won't even let you publicly discuss investments that are already funded. They also charge higher fees to investors.

I just want to point out that there is nothing inherently murky or non-transparent about 506(b). Both syndication methods require you have a PPM that very clearly lays out the investment. And it is SEC law that prevents public solicitation and advertisement of the 506(b) deals and not any attempt to not be obscure. Most syndications are 506(c) simply because it's easier and are less of a headache due to it being easier to vet accredited investors vs sophisticated investors.

@Michael Le  In theory "nothing inherently murky or non-transparent about 506(b)" this is true. However, some of the 506b platforms do not want transparency in my opinion.  They think news of a bad deal will kill their business model.  I know of 2 websites that either changed focus or shut down because of threats or cease and desist letters from 506b platforms about discussing their investments.

CrowdStreet, a 506c platform list all of their past deals and how they are doing.  https://www.crowdstreet.com/investors/ Can you name one 506b platform that does this?

@Mark Robertson No, I do not. You seem much more familiar with the online crowd funding model and websites. Any idea what about a 506(b) would cause this divergence in execution? Because from the perspective of a normal syndication, I can't see why that would be so.

The issue here has more to do with the Lamp NAL than it does with 506(b) versus (c) from my understanding.  Here is a link to the Lamp NAL:

Lamp NAL From SEC

The enforcement division lays out that limiting access to a site with a 30-day cooling off period and questionnaire is kosher above.  Any action a platform takes to advertise their track record runs afoul of this fact pattern and subjects them to risk of enforcement action.  

Unfortunately the economics combined with the compliance limits non-accredited investors to one of the following types of scenarios with things as they exist today:

1.  Find an issuer using the issuer's exemption who can establish a pre-existing, substantive relationship with the investor prior to an offering.  This issuer can then use many exemptions to take non-accredited investors into their offering if the extra liability and cost is worth it

2.  Title IV issuances, which are really only feasible for pooled investments like REITs or funds.  The lengthy back and forth process with the SEC and the legal cost of constructing one of these offerings demand that the money is invested on a discretionary basis by a fund manager of some sort.  There is really no other way to make it feasible and compliant simultaneously

3.  Title III issuances, which subject the Portal to FINRA scrutiny and limit the raise to $1M per issuer in a trailing 12-month period.  These rules were really written for angel and seed rounds and NOT for real estate.  Since the blunt instrument of the securities laws cannot play favorites for real estate this makes most offerings of any size intractable using this exemption

Quality sponsors are still using item 1 above.  

Quality platforms are using item 2, but the investor may as well buy a private REIT or other financial product IMO relative to what is currently being offered.

Item 3 has a very short list of legal Portals to select from.  They're listed here:

Funding Portals FINRA Regulates

It is a tall order for a Portal to maintain enough deal flow to offset the cost of compliance for Title III and thus these types of offerings are functionally excluded right now.  The economics simply don't work very well and most people aren't gluttons for punishment.  You may as well start a full scale BD if this is your chosen business model.  

There is hope for this to change if the cap is raised to $5M for Title III in the future.  For now I'd look for Item 1 type situations if your goal as an investor is to find quality sponsors that know what they're doing.  

Yes you can invest in a Reg A fund like UGFinc.com
You do not need to be accredited
They pay decent returns
They are registered (not just filed) with the SEC

There are good reasons why those requirements exist IMO. Rather than try to get around them, I would try to understand why they are there and focus on getting to accredited investor status.

One thing to note that's not sure clear is when they calculate $1M in net worth you do have to exclude your primary residence but that also means you exclude your mortgage.

Also if you're married it's $1M COMBINED (excluding primary residence and primary mortgage) so be sure to add together all assets including your partner's.

The only annoying thing about qualifying under $1M is you need to renew that every 3 months.