Investing in real estate comes in many forms. You can invest directly by yourself, or you can invest in the deals that other individuals put together via a private security offering. These investment opportunities often have a high barrier to entry.
The first thing you may be thinking is, “of course – real estate is expensive. Who has that kind of money?” The reality is that what may be holding some people back from investing is not the lack of money but rather some important rules defining who can invest in these kinds of opportunities.
Who can become an accredited investor?
These lucrative investment opportunities are exclusively available for individuals that meet the SEC (Securities and Exchange Commission) definition of an accredited investor. Many individuals are not aware of whether they are accredited investors. You may incorrectly assume that you are or are not an accredited investor.
The accredited investor definition was created with the intent of protecting individuals from the potential financial risks of investing the private securities markets. This select class of investors should have the financial reserves and knowledge that would allow them to invest in potentially risky private market investment opportunities and be able to survive potential downsides from investing.
While it is expected that someone who is an accredited investor would have a decent amount of knowledge related to investing, there is no test that you need to take to verify your knowledge base. In fact, many individuals that qualify as accredited investors may have minimal understanding of investments. This is good news because it means almost anyone has the potential to eventually become an accredited investor. To become an accredited investor, you just need to meet the SEC definition of an accredited investor.
What is the threshold and current definition of accredited investors?
The SEC definition of accredited investor is actually quite wide but the most common thresholds that are referenced relate to earned income ($200k individually or $300k as a married couple) and net worth (greater than $1 million).
In 2020 the SEC updated the definition of accredited investors to also include professionals who have licenses related to the sales of securities (such as series 7, series 65, and series 82) and other means of showing their financial acumen amongst other new additions. This helped to widen the pool of potential investors who could qualify for these private market investment opportunities.
What are the benefits of being an accredited investor?
Being an accredited investor provides many advantages to grow your wealth and provide multi-generational benefits to your family. Private market investment opportunities typically outperform public markets, diversify your investment portfolio, and allow you to invest in opportunities that the general public don’t have access to.
For those familiar with the stock market, imagine investing in Facebook, Amazon, or Netflix prior to the Initial Public Offering (IPO). These stocks are worth significant amounts today and if you were a part of the group that invested prior to the IPO you would have quite the treasure chest now. These are unique examples, but the reality is that the private markets offer many similar lucrative opportunities every day which only the accredited investors hear about.
What does the SEC Staff report on the accredited investor definition say?
The SEC reviews the definition of accredited investor every four years. During these reviews they identify potential areas for improvement on the definition and how it impacts the investment landscape. Per their most recent review in 2023 they noted that the percent of US Households that qualify as accredited investors has grown over the last 40 years from 1.8% of households in 1983 to a whopping 18% of households in 2022.
Potential problems have been noted about the accredited investor laws
Two issues that are on regulator’s minds when it comes to the definition of accredit investors is the definition’s impact on diversity and inclusion as well as the potential need for revision to account for inflation.
Inflations impact on the definition of accredited investor
Given the fact that the percent of qualified households has grown so significantly over the last 40 years it is evident that inflation has played a big role. Previously in 1983 less than 2% of households could even access private market investments. Now on average every 1 in 5 households are accredited. This means you may know an accredited investor in your group of friends. That accredited investor may even be you!
There was an even greater growth between 2019 to 2022 as the figure jumped from 13% in 2019 to 18.5% of households in 2022. That’s a 5.5% jump in 2 years. To correct for inflation the standard would have to be updated to $3 million net worth or $911,352 joint income. This would knock the percentage of households included down to 5.7%.
Diversity and inclusion considerations on the definition of accredited investor
The Impact on diversity and inclusion in the definition of accredited investor has been a debated topic. It is noted by commentators that the current definition already limits the inclusion of underrepresented demographics and they frequently do not meet the definition of accredited investor. This creates a situation where these underrepresented individuals are left out of the opportunities to build generation wealth via investing in private investment offerings. Over time the generational wealth gap increases leaving many behind. Changes to the definition of accredited investors could potentially exacerbate this already existing chasm.
How will this change impact you?
There are no changes that are currently effective so no need to worry right now that you may lose your accredited investor status (or never attain it). The SEC’s comments from this review do provide insight into what may potentially be coming down the road. As an investor interested in the private markets you should continue stay updated on releases from the SEC to be aware if they do ratify any formal changes.
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