To broaden access to private capital markets, the Securities and Exchange Commission (SEC) revised the definition of an accredited investor on August 26, 2020. It indicates that for the first time, people can legally invest in private real estate assets based not just on their income or net worth but also on established, explicit criteria of financial sophistication. The new rules won’t go into effect until October 26, 2020, 60 days after they’re published in the Federal Register.
Accredited investors were previously required to meet one of two criteria: either have a net worth of at least $1 million (excluding the value of the investor’s primary property) or have an annual income of at least $200,000 (averaged over the previous two years). If a married couple has had an annual income of $600,000 in the previous two years, they would also be considered accredited investors.
Because information about private investment offerings was initially more elusive than that available on public markets, they drafted the first guidelines before private investments were as easily accessible online as they are today. Although public firms must publish and disclose more information, this does not make investing in public security less dangerous. The investor must perform adequate due diligence when making a public or private investment.
Documents such as audited financial statements and quarterly reports, which might be difficult to get for some private investments, are readily available for download via our web portal. In addition, our co-founders have webinars periodically to inform investors and always leave enough time for current and potential investors to ask questions.
In short, the new definition of an accredited investor indicates that a person’s wealth and income are not necessarily reliable measures of their level of expertise. Many people would like to invest, but they don’t because they don’t have the money or the income to do so. These people have the expertise and the experience to invest successfully, but they can’t do it. The new legislation creates a place for these investors while at the same time providing two different categories for those participants who have greater financial expertise.
Authorized Individuals
The term “licensed persons” refers to the first of the newly created categories of accredited investors. This category includes people who have earned particular professional certificates, designations, and other credentials. The Licensed General Securities Representative (Series 7) certification, the Licensed Investment Adviser Representative (Series 65) certification, and the Licensed Private Securities Offerings Representative (Series 82) certification are all examples of qualifying certificates. The amendment provides the SEC with considerable leeway to create additional designations over time because it contains a list of characteristics that will be considered by the SEC when determining which professional credentials will qualify. According to SEC Commissioner Hester Pierce, “The Series 7, 65, and 82 Licenses qualified today represent the tip of the iceberg of professional certifications, designations, and other credentials that should qualify an individual for accredited investor status.”
Employee with Expertise
Knowledgeable personnel make up the second brand-new subset of accredited investors. According to the new regulation, “knowledgeable employees” can now be considered accredited investors to invest in employer-sponsored funds. Any employee who has been actively involved in the investment activities of a fund for at least 12 months, or any executive officer or individual working in a similar capacity, is considered to be a “knowledgeable employee.”
Even though the scope of these revisions is narrow, the most recent changes appear to be the first step towards the larger goal of making it possible for a greater variety of people to participate in private investment offerings. It’s great to see the Securities and Exchange Commission (SEC) start making reforms that align with our vision, given that our mission is to revolutionize how private investors participate in real estate.
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