Changes to Definition of Accredited Investors
Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
Changes to Definition of Accredited Investors
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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8yI 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).
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- Rental Property Investor · Cleveland, TN · Member since 2015 · 176 posts · 58 votes8y
let’s see if it passes.
- Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes8y
@Jack B. I don't think anyone on this thread is saying that you and your long time acquaintance are equivalent in investor sophistication, knowledge, determination or hard work. You say that "accomplishment should be the barrier to entry" but that doesn't happen in all cases. Using @Joe Splitrock's analogy of high stakes poker, all that's required to play is a big stack of chips and it doesn't matter where it came from. If you grinded it out for years and have a big enough wad, everyone would say you deserved to play. If you got your stack because your rich parents gave it to you or you won the lottery, you'd still be allowed to play with the high rollers even if you didn't have the skill or the knowledge to stand a chance.
@Anthony Gayden mentioned the "mass affluent," those with net worth in the hundreds of thousands and making 6 figures. These people will be helped. A quick google search showed that the U.S. Census bureau found that 20% of U.S. households earn at least $100k per year. 5% of households make $250k per year. In my opinion, that's a lot of people that are probably "accredited investors" by our definition on this thread.
There appear to be two main viewpoints on this thread:
1. The definition of accredited investor should be expanded to give the greatest amount of people the freedom to invest as they determine even if more people are at risk of losing their money
2. There need to be protections in place to prevent people from making bad choices that might lead them to lose substantial amounts of money.
That's the point where we have to just respect the other's opinion because it comes down to one's first principles.
Going back to the poker analogy....if a non-accredited investor wanted to take his last $50k and invest it in a 506(c) offering, the sponsor would have to tell him no. The same investor could then go straight to the casino with his $50k and risk it all in the poker room, blackjack table, or roulette. There's no law preventing him from doing just that....
- 8yDaniel DietzPro MemberRental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Great summary @Andy Mirza!
I am of the camp that this would be a GREAT change to things. There are so many different ways of looking at it, as you point out.
I am quite a ways off from the current definition of Accredited, but easily meet the intent of Sophisticated. I have built houses, flipped houses, and have over 25 rentals that I invested in with a combination of traditional loans, portfolio loans, SDIRAs and SOLO401Ks while using leverage. I have used private money and partners on deals also. I do literally hundreds and hundreds of hours of studying every year on all thing real estate and investing.
I would venture to say that with that back-round, I am as well or better qualified than many people who DO meet the current condition. Is the person who has never invested in investment real estate but just sold their primary house or farm or small business better equipped than me to analyze if a syndication deal on a 50 unit apartment deal is 'safe' or not? What about the couple who just got an inheritance? Or the doctor who makes 500K but has never invested in real estate before?
The other issues I have with the rules are that I can go out and buy an Individual Note, which is highly risky, but not invest in many Note Funds that help spread out risk?
Or what about the fact that I can go and buy almost any stock, stock option, high risk bonds, or other similar investments which are HIGHLY RISKY if one does not understand them, but not with a Real Estate Syndication that has a 5+ year track record of paying out preferred returns without fail and has a long list of satisfied investors?
I dont have the answer of what the 'rules' should be, but I know they are not very logical the way they are now.
Dan Dietz
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes8y@Grant Rothenburger For those that think that people follow a “standard” and would not take new investors all I say is look to the banks when the government reduced lending standards. A few banks started to do this and saw the profit in it, then other banks were not as profitable so they lowered there standards and then we came to the whole fiasco of forging documents, lying. Case and point I spoke to someone last month starting a fund with 0 I repeat 0 experience in what they were investing in. They had never ever did a deal based on what the fund was investing in. You think that person will not be doing backflips when they can take the $ from someone who is “accredited” now. The reason for accredited investors is not how smart they are but they have higher wealth to be able to take on risk and if they lose their investment they should not be heavily effected.
7e investments53 Reviews - Rental Property Investor · Las Vegas, NV · Member since 2018 · 133 posts · 171 votes8y
@Daniel Dietz I agree with many of your points. I am just learning about private placements and I am not accredited myself (although getting close), but I have a lot of years of investing experience including stock and options.
I personally think anyone should be allowed to invest in whatever they want. Investors just have to be responsible and do the research and know what they are investing in and be willing to accept the risk of loss. If the sponsor or the offering seems sketchy, or the investor is not comfortable with the risks, then don't do it.
I personally don't think the role of government should be to protect people from themselves. Part of being free is the freedom to make bad decisions. And why are we selective about it? Why do we protect investors from themselves, but we don't protect gamblers and lottery players from themselves? Any idiot is free to take their life savings to Las Vegas and put it on black, but if and educated professional who makes $150k a year wants to invest $20k in a private placement may not be qualified. I don't get it.
And even with accreditation you can't prevent fraud. Bernie Madhoff can attest to that.
Anyway the rules are what they are, all we can do is adapt to them as best we can.
- Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes8y
Very interesting discussion here. I agree generally with the folks who believe the current rules are somewhat arbitrary. If the point is to protect people from themselves then they aren't very comprehensive. Why can a guru accept my last $40K to take their house flipping course, but a syndicator can't accept my last $40K in an investment fund. That isn't to say that one or the other is better, but those two things, as well as the ability to bet as much as you want on black or a sports outcome don't seem to make sense in the same world.
- Specialist · Carolina Beach, NC · Member since 2016 · 390 posts · 496 votes8y
Many of the opinions seem to make the argument that high income or high net worth (i.e. Accredited Investor) doesn't necessarily mean the investor is a smart investor. They could be a total numb skull who inherited the money. My aunt is a probate attorney in California, trust me, this happens more often than any of us would like to admit.
That said, as others of pointed out, the definition of Accredited Investor really has very little to do with the investor's level of knowledge or skill investing, but more to do with their ability to absorb a significant loss of an investment. If they lose $50,000 on an investment, that's at most 5% of their total net worth, assuming they just barely qualify.
Most sponsors I've dealt with qualify their investors on their Accreditation status AND temperament, risk tolerance, alignment of interests, etc. Just because a person has the money, doesn't mean they are a good fit for every investment, or every deal sponsor.
- Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes8y
Originally posted by @Chris Seveney:
@Grant Rothenburger For those that think that people follow a “standard” and would not take new investors all I say is look to the banks when the government reduced lending standards. A few banks started to do this and saw the profit in it, then other banks were not as profitable so they lowered there standards and then we came to the whole fiasco of forging documents, lying.Case and point I spoke to someone last month starting a fund with 0 I repeat 0 experience in what they were investing in. They had never ever did a deal based on what the fund was investing in. You think that person will not be doing backflips when they can take the $ from someone who is “accredited” now. The reason for accredited investors is not how smart they are but they have higher wealth to be able to take on risk and if they lose their investment they should not be heavily effected.
I agree with everything you said. You really just said my point in a different way, so thanks! People who can't afford to lose money, will lose money. I'm not speaking for all syndicators, money raisers, whatever, when I say the GOOD ones wouldn't take $50k from someone with a $200k net worth. Sure, some will and that's the problem, as of now if an accredited investor makes a foolish investment or even a good one that went bad, they can (usually) afford it. When the amount they lose is 1/4 of their net worth, they can't really afford to lose it.
Good syndicators and anyone who raises money, that have track records, do not have an issue raising money, their issue is finding deals to spend money on! So for them, they have no interest in taking money from someone who can't afford it.
Clearly this is all speculation and I could be completely wrong, but I see this making it easier for illegitimate syndicators, fund operators, and money raisers, to steal from the unaccredited crowd. Like I said, maybe I'm wrong, maybe a lot of good would come from it, maybe we'll find out one day. This is all purely opinion at this point, and you know what opinions are like....
I had been following the legislation, but didn't come across this thread until now. If I'm correct, while the bill passed the house, it never passed in the senate and is 'dead.' Correct?
https://www.govtrack.us/congress/bills/115/s2756
"This bill was introduced in the 115th Congress, which met from Jan 3, 2017 to Jan 3, 2019. Legislation not enacted by the end of a Congress is cleared from the books."
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