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229 Anna Pinedo, Partner at Mayer Brown, Accredited Investor Standard
The Accredited Investor Standard
The worries of, for example, Commissioner Piwowar who was one of the first to suggest perhaps doing away with the accredited investor standard. Or the more recent comments that Commissioner Peirce made regarding accredited investors. It all derives from the same sort of public policy concern right. Do we need this standard? The accredited investor standard. Is it helpful? Is it still serving its purpose or, if you were to take the other view, if you were to take the commissioner Piwowar view, if companies are staying private longer and companies are experiencing more of their growth these days while they're private instead of in the years that immediately follow their public offerings, are we essentially doing a harm by not allowing a greater percentage of the investing public to participate in those offerings. I think it's interesting to look at it from both angles.
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Dollar Amounts as Proxies
In the securities laws we have lots of instances where we use dollar amounts, assets as a proxy for identifying the kinds of individuals that can fend for themselves. For example, if you look at the definition of qualified client or if you look at the definition of qualified institutional buyer, qualified purchaser, any number of investor standards that we have sprinkled throughout the securities laws. We've always sort of resorted to having these dollar thresholds be a proxy for getting at whether somebody has the wherewithal to bear some investment risk or could, if an investment goes sour, it could withstand the loss. There's nothing wrong with that. It's important to have bright line net worth and net income standards. That's very helpful because it provides legal certainty because there are crisp answers that you and I can identify – we know what those are, we know what those mean. They're not subject to judgment. They're easy to verify. For broker dealers for investment advisers having that clarity and legal certainty is important.
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Education vs. Net Worth or Income
Indeed, education and income or networth are not necessarily equivalent. Net income or net worth suggests that a person is probably going to be able to take certain financial risks. There may be a little bit of a paternalistic quality to that regulation i.e. deciding that we should only let those who can withstand risk of loss make an investment. However, it's important to have some proxies even if they're imperfect and net worth and net income are imperfect but there is merit to the notion that you can substitute net income and net worth. These are people who probably could withstand the fact that their investment in a startup amounted to zero; that they lost it all.
Keeping in mind that the accredited investor standard was promulgated in 1982 it may be a reasonable approach to index the standard to inflation, for example. We have inflation indexes written in to a variety of other thresholds and, perhaps, there's a lot of common sense appeal to that. Of course, applying an inflation index to the standard would, however, reduce the numbers of eligible investors so to contemplate such a change, one might go back to some of those interesting public policy issues that are now coming about. There'd be some reluctance to limit the overall number of investors that are able to or that may participate in in private placements. This is because private placements have a more significant role in capital raising than they did historically. Then again, another way to go about things would be to require more disclosure in connection with certain private placements. You could attack the problem in any number of different ways.
For and Against Retaining the Accredited Investor Standard
Disclosure Requirements
Now for those that are in favor of just setting the accredited investor standard aside there is a good story to tell and that is that the capital markets have changed a great deal particularly in the last 10/15 years. We now have private companies with the ability to go out to a broader universe of investors and to conduct successive rounds of financing and to become Unicorn's and essentially to become household names and have some dispersed ownership while still remaining private. A lot of the wealth that's being built and a lot of that explosive growththat's being experienced by these companies is only open to institutional investors and accredited investors because, in order to avoid disclosure requirements, most private placements are limited to accredited or institutional accredited investors or equivalent. Wouldn't it make sense, from a public policy perspective, just as we once encouraged retail participation in IPOs to encourage broader participation in some of these exciting private placements? That's the argument that would be made.
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Process for Change
In the Treasury report on capital markets, one of several reports that was issued in response to the recent Trump presidential order, a number of suggestions were made, but it is only within the SEC's domain to evaluate whether the definition ought to be changed or not. Obviously the SEC has done its work. The SEC has completed its study. The study's been done for some time. There have been comments solicited from the public and submitted on the standard.
The SEC's investor advisory committee has weighed in on the standard and the takeaway from all of that is that most people would like to keep the net worth and net income measures, maybe with some indexation, maybe with some changes in the numbers, but also want to see added individuals who have certain designations. There is another recommendation to add knowledgeable employees to the standard which makes a lot of sense. The collective wisdom of the commenters, the Investor Advisory Committee, the SEC report, is to keep it intact but make some changes.
For any changes to occur, the SEC would have to propose changes to the definition and on the SEC's published agenda, the Reg-Flex agenda, one of the actions in the long-term category is consideration of proposed changes to the accredited investor definition, perhaps bringing it to the top of the agenda in no less than six months or so.
SEC staff would come to the commission with a proposed rule. The commission would take a vote on releasing the proposed rule for comment. There'd be a comment period and then presumably after a time the rule after giving weight to the comments the rule would be adopted modifying the definition in Rule 501.
Anna believes that the Standard will stay substantially the same, maybe with these added categories. It is unlikely that there will be any reduction the number of people who qualify, rather, if anything, it's going to be increased.
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