Changes to Definition of Accredited Investors

58 Replies

There's hope that the definition of accredited investors will change in the near future. The House overwhelmingly passed JOBS Act 3.0 on a bipartisan basis by 400+ votes. With this amount of support, the Senate will surely pass it as well and Trump will probably sign it into law. The definition of accredited investor will be updated to include "an individual determined by the Securities and Exchange Commission (SEC) to have qualifying education or experience." Hopefully, that will mean that more people will qualify as accredited investors and be able to invest in opportunities that were previously unavailable to them.

See the story from Housing Wire and a link to the bill in Congress:

https://www.housingwire.com/articles/46106-house-p...

https://www.housingwire.com/articles/46085-waters-...

https://www.congress.gov/bill/115th-congress/house...

I've got my fingers crossed! Not only will this help my business but I think it's more fair for everybody......

Good news!  Fingers crossed.  Thanks for sharing @Andreas Mirza

Great news! Will check back for update!

Andreas Mirza what’s the supposed change to the accreditation? The part of adjusting for inflation? Everything else looks the same

The specific piece of legislation. Certainly makes it more subjective as to who would qualify.

4. H.R. 1585, Fair Investment Opportunities for Professional Experts Act – Passed in House by voice vote on November 1, 2017.

Sponsored by Rep. David Schweikert, R-Ariz., co-sponsored by Rep. Carolyn Maloney, D-N.Y., and Sinema, and modified by an amendment in the nature of a substitute offered by Rep. French Hill, R-Ariz., the bill modernizes the definition of accredited investor so those who do not have a high income or high net worth but do have the education and job experience to evaluate investment risks and merits can participate in the growth of promising companies. This change will provide more Americans with greater investment opportunities and enable the businesses they invest in to create more jobs.

@Caleb Heimsoth @Gary Headrick Yes, this looks to be subjective and determined by the SEC assuming the bill gets signed into law. Maybe it will be similar to the non-accredited investor for 506(b) offerings. In our 506(b) offering, non-accredited investors still have to check a box indicating that "I have such knowledge of and experience with investing and/or financial and business matters that I am capable of evaluating the merits and risks of investing in the Units."

With the current administration and the intent of the general bill, I would expect that the SEC will make a favorable change to the definition to allow far greater choice and opportunity for non-accredited investors. We'll have to wait and see.... 

Originally posted by @Gary Headrick :

The specific piece of legislation. Certainly makes it more subjective as to who would qualify.

4. H.R. 1585, Fair Investment Opportunities for Professional Experts Act – Passed in House by voice vote on November 1, 2017.

Sponsored by Rep. David Schweikert, R-Ariz., co-sponsored by Rep. Carolyn Maloney, D-N.Y., and Sinema, and modified by an amendment in the nature of a substitute offered by Rep. French Hill, R-Ariz., the bill modernizes the definition of accredited investor so those who do not have a high income or high net worth but do have the education and job experience to evaluate investment risks and merits can participate in the growth of promising companies. This change will provide more Americans with greater investment opportunities and enable the businesses they invest in to create more jobs.

 So then we will have to confirm their educational records and job history?

Can of worms... and a field day for lawyers that sue syndicators.. is what I read into this.

I agree with @Jay Hinrichs - this may sound great but reality is will it get implemented. Anything left to interpretation will end up in court and then how will the courts decide ? Most likely it will be state dependent and different states with different responses which just turns this into a fiasco

I have 15 years of experience in investing in actively owned real estate and 3 years of very immersed experience in passive investing in private placements and it is still challenging to source and select conservative opportunities (particularly in today's market).  The "look at 100 and close on a couple" adage is as applicable in passive as it is in active investing but many investors simply do not follow it.  They hear the words private placement, see fancy offering materials, and watch rousing deal webinars and they get that excited (premature) bowel movement feeling.

The financial protections (net worth and/or income) from the high risks of private placements are important and just having the knowledge part may not be sufficient protection.  We have to look past the lens of just trustworthy and prudent offerings to all the bad ones out there (and I see a ton of them).

@Jay Hinrichs @Chris Seveney I hope that you guys are wrong and that it wouldn't be as bad as you think. For a 506(b) fund, investors self-identify as accredited or non-accredited but sophisticated. The sponsor cannot use general solicitation. If an accredited investor self identifies under a "sophisticated" investor definition, I don't see a huge difference in procedure but you open up the opportunity to far more people. Maybe this is what you're getting at. More people will qualify so greater chance that more folks will be ripped off and then complain and sue.

@Andreas Mirza

The concern I have is the "sophisticated" investor definition in Regulation D under Rule 506 is subjective and really leaves the decision up to the court to decide if there is a lawsuit. I am in the process of starting a fund and want nothing to do with a 506(b) because of the risk involved with the "sophisticated" definition and reporting requirements. If the accredited definition becomes subjective like the sophisticated definition I am not sure how it also would work, as who would qualify someone as an accredited investor if it was based on knowledge. I do not see any attorney or CPA wanting to take that risk. 

@Mike Dymski I respect your experience and opinion. I've seen plenty of people with money (accredited investor qualified) that don't have a clue what they're doing, are prone to getting ripped off, or are financially irresponsible. Net worth and/or income are no guarantee that a person is protected. It comes down to the person's experience, knowledge, character, everything that makes one a good investor. The SEC might think that high income and net worth indicate that the investor is automatically smart at making investments but it's faulty logic in my opinion. When it comes down to it, it galls me that there's a difference in freedom because of nanny state tendencies. If you don't have the wealth to be accredited, then you're too stupid to evaluate and gauge the risks of a private offering. You are cut off from participating in something that people with money can. The government is taking a freedom away from me and that pisses me off.

@Andreas Mirza I prefer the income or net worth standard as it is easy to prove. 

You add in subjectivity of someone's level of experience or education, things get messy.

Originally posted by @Andreas Mirza:

@Mike Dymski I respect your experience and opinion. I've seen plenty of people with money (accredited investor qualified) that don't have a clue what they're doing, are prone to getting ripped off, or are financially irresponsible. Net worth and/or income are no guarantee that a person is protected. It comes down to the person's experience, knowledge, character, everything that makes one a good investor. The SEC might think that high income and net worth indicate that the investor is automatically smart at making investments but it's faulty logic in my opinion. When it comes down to it, it galls me that there's a difference in freedom because of nanny state tendencies. If you don't have the wealth to be accredited, then you're too stupid to evaluate and gauge the risks of a private offering. You are cut off from participating in something that people with money can. The government is taking a freedom away from me and that pisses me off.

Net worth and income having nothing to do with investor intelligence.  The Act does not require you to have both wealth and knowledge...just wealth.  You are making an insinuation about the SEC's intent that does not exist in the current Act.  The SEC simply knows that a stupid person who has $1 million in net worth can afford to lose $50k in a non-public offering more than a stupid (or smart) person with only $50k in net worth.

Most of the sponsors I know do not want the added risk and administrative burden.  Raising capital is already a time-consuming, challenging, and risky enough exercise.

@Chris Seveney @Brian Adams Do you have examples of how things get messy? How do courts look at self identifying as accredited or non-accredited? I don't have experience with lawsuits related to disgruntled investors and I'm curious to know how they would play out. My belief has been that the PPM is what gives you the greatest protection from liability whether the investor is accredited or not. It's 100+ pages of telling the investor that the investment is extra risky and that they can lose everything. The investor signs subscription agreements that say the same things. I would think it would be difficult for a investor/plaintiff to stand up in court and say that they didn't understand the risks. I am sure that they still do but what is the risk to the sponsor that this will hold up in court?

Also, if the standard is to require the investor to self-identify, how is the sponsor supposed to be responsible? 

Originally posted by @Andreas Mirza:

@Jay Hinrichs @Chris Seveney I hope that you guys are wrong and that it wouldn't be as bad as you think. For a 506(b) fund, investors self-identify as accredited or non-accredited but sophisticated. The sponsor cannot use general solicitation. If an accredited investor self identifies under a "sophisticated" investor definition, I don't see a huge difference in procedure but you open up the opportunity to far more people. Maybe this is what you're getting at. More people will qualify so greater chance that more folks will be ripped off and then complain and sue.

 Canada recently introduced the definition for "Eligible Investor" which aims to disarm any ambiguities on the merit of their investment education.  Perhaps the US will adopt a similar approach.  

Instead of a prospectus, companies will need to issue investors an offering memorandum, which is a legal document that is not pre-cleared with the regulators like a prospectus would be. The memorandum does, however, need to contain standard disclosures, such as information about the management or promoters of a company raising money, the risks involved with investing and how exactly the company will use the money.  The investment allowance is as follows:  

  1. Any investor can invest up to $10,000 within any 12-month period without restriction into private market investments.
  2. Eligible investors* can invest up to $30,000 annually without suitability advice from a licensed investment professional (an exempt market professional).
  3. Eligible investors* can invest up to $100,000 annually with suitability advice from an exempt market professional. That advice may not cost the investor directly – it will appear free – but the dealer will receive a commission from the issuer that will otherwise reduce the investment’s potential return.

(*In this context, “eligible investors” must have had a minimum of $75,000 of income personally in the past two years; income of $125,000 when combined with a spouse; or $400,000 of total net assets either alone or with a spouse.)  

@Chad Urbshott Interesting...

So, the memorandum sounds the same as ours. Reg D, 506(b) and 506(c) offerings require a similar offering memorandum which is not pre-cleared by a regulator. We have to register with the SEC as offering unregistered securities. There are compliance issues but the sponsor is responsible for them. 

Here, there are no upper limits to how much an investor can invest in a 506(b) or (c) but there are for other offering types.

Do you have offerings where there is no upper limit? Or is this the only type? What do you think of your system versus the U.S. system of private offerings?

The text of the proposed House Bill regarding accredited investors is:

"any natural person the Commission determines, by regulation, to have demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by the Financial Industry Regulatory Authority or an equivalent self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934)"

The last part is of most use, but whats an equivalent self-regulatory agency? Using the powers of Google and ctrl F: "The term ‘‘self-regulatory organization’’ means any national securities exchange, registered securities association, or registered clearing agency..."

Alright, so FINRA or one of the three entities listed in SEA '34 need to validate the investors experience. As luck would have it, the only registered securities association currently in existence is FINRA, so then there were three. Also, maybe by coincidence, but probably not, FINRA is the body that oversees the Registered Representative and Principal exams (Series 7, 24, 63,65)

Given those facts two things jump out at me 1) any newly accredited investors will have a heavy finance, securities, trading background and will prove their knowledge through some sort of exam/certification/license that has nothing to do with being accredited, ie. Series XX, CFA, CIPM ect. 2) This most likely won't be terribly earth shifting in terms of RE syndication since the subset of folks who work in finance and already aren't accredited is pretty small.

This entire post is the result of no more than 15 minutes on google and to much coffee, so give it as much credence as you normally do things you read from random people you've never met on the internet.

Originally posted by @Andreas Mirza:

@Chad Urbshott Interesting...

So, the memorandum sounds the same as ours. Reg D, 506(b) and 506(c) offerings require a similar offering memorandum which is not pre-cleared by a regulator. We have to register with the SEC as offering unregistered securities. There are compliance issues but the sponsor is responsible for them. 

Here, there are no upper limits to how much an investor can invest in a 506(b) or (c) but there are for other offering types.

Do you have offerings where there is no upper limit? Or is this the only type? What do you think of your system versus the U.S. system of private offerings?

 To be honest, I'm not all that familiar with this but as far as i'm aware if you want to invest more than $100K you need to be accredited.  

So the guy I know who went to ITT Tech, failed at a tech career, then took 10 years to get an MBA from Devry on his parents dime will now be in the same category of me, the self made millionaire who did his MBA in 1.5 years at a top school? Awesome....This sounds like more lowering the standards so more of the not quite so capable can be part of the club...

@Jack B. The change hasn't happened yet. It looks like it will happen but we won't know the final details until it does so all this talk is really just bit of fun conjecture and, from my view, a little bit of hope that everybody has the same access to investments. Accredited and non-accredited status are artificial constructs used with the intent to grant access to one group of people or another. The rule may be well intentioned but it always struck me as elitist. I would not consider you, as a self made millionaire 1.5 year MBA graduate, equal to a 10 year Devry graduate. However, I believe that the 10 year Devry grad should have the same access as you. There are a lot of hard working, self educated folks (especially here on BP) who haven't made it to the strict definition of an accredited investor yet. That doesn't make them less qualified to understand what they're getting into, does it? 

I dont see what the hype is all about... in all my accredited investments I’ve never once been asked for any type of ‘proof’ that I qualify.  It’s always a ‘check this box’ or ‘speak to some random guy for a few mins on the phone’.  Granted I’m not knee deep in these types of investments but it doesn’t exactly seem like it’s enforced from what I’ve seen. 

Originally posted by @Jack B. :

So the guy I know who went to ITT Tech, failed at a tech career, then took 10 years to get an MBA from Devry on his parents dime will now be in the same category of me, the self made millionaire who did his MBA in 1.5 years at a top school? Awesome....This sounds like more lowering the standards so more of the not quite so capable can be part of the club...

 The current proposal may not be adequate to your way of thinking, but the definition of accredited investor needs to be changed. Net Worth and Income have no causal relationship to Investment sophistication. There are plenty of people without any formal education who have self-educated and are fully capable of doing the due diligence to analyze sophisticated private securities. And there are plenty of millionaires who are dumber than a box of rocks.

Originally posted by @Andreas Mirza:

@Mike Dymski I respect your experience and opinion. I've seen plenty of people with money (accredited investor qualified) that don't have a clue what they're doing, are prone to getting ripped off, or are financially irresponsible. Net worth and/or income are no guarantee that a person is protected. It comes down to the person's experience, knowledge, character, everything that makes one a good investor. The SEC might think that high income and net worth indicate that the investor is automatically smart at making investments but it's faulty logic in my opinion. When it comes down to it, it galls me that there's a difference in freedom because of nanny state tendencies. If you don't have the wealth to be accredited, then you're too stupid to evaluate and gauge the risks of a private offering. You are cut off from participating in something that people with money can. The government is taking a freedom away from me and that pisses me off.

If someone has high net worth or high income, it is fair to say they know how to make money - more than the average person. They either have some higher level of education/experience or they started a business. Minus lottery winners, inheritances and professional sports stars, it does take a high level of skill to amass money. That is hardly faulty logic. The point is people who qualify as accredited are generally better decision makers and even if they lose money, they are more likely to be able to recover. Meaning if you have built a million dollar business or you are a neurosurgeon, then you will make the money back no problem.

 The rules keep vultures from robbing people of their life savings. The same investments that provide a nice opportunity for upside, also provide an equal opportunity for down side. These private investments are not regulated in a manner to protect the common person. The government protects people from themselves. Most people are sadly not smart enough to know their own limitations. They are too stupid to understand the risks as you put it. They don't even know when they are in over their heads and people will put their life savings into a risky investment. 

Is a millionaire smarter financially than a guy with $5000 in his bank account, I put good odds on yes. Sorry if the truth hurts, but if somebody is really financially smart, they will become accredited on financial merit. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here