What the SEC’s Expanded Definition of ‘Accredited Investor’ Means for Crowdfunding

By The ArborCrowd Team
Oct 20, 2020

The U.S. Securities and Exchange Commission (SEC) recently adopted amendments to its qualifications for accredited investors, allowing a slightly broader group of investors to access private capital market transactions.

Since 1982, accredited investor status — and thus the ability to access certain investments — was limited to those with either a net worth of at least $1 million, excluding their primary residence, or individuals with an annual income exceeding $200,000 for each of the past two years ($300,000 for married couples) with a reasonable expectation to meet that salary threshold for the current year as well. Under the amendments, those guidelines will be expanded from simply income or wealth based to include certain certified financial professionals, and allow the aggregation of income and assets with “spousal equivalents.”

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The updates grant accredited investor status to knowledgeable employees of financial institutions and those who have obtained Series 7, 65 and 82 licenses, which are certifications commonly held by investment advisers, financial planners, stockbrokers, and insurance agents. By adding spousal equivalents to the definition of accredited investor, a domestic partner who is not a spouse may be included when pooling resources to meet income or wealth thresholds.

Additionally, the amendments expanded the entities that may become accredited investors, adding family offices and Indian tribes among others, so long as they have at least $5 million in assets under management. All of the changes are expected to go in effect on Dec. 8.

Accredited investor verification is required to invest in a variety of private securities offered under Rule 506(c) of Regulation D of the Securities Act of 1933. While these offerings may provide strong upside for investors, the SEC walks a fine line between increasing access to private market opportunities for more individuals while maintaining investor protections for those who either don’t have the financial sophistication to properly evaluate deals or don’t have the financial security to weather potential losses.

However, having been introduced nearly 40 years ago, the accredited investor qualifications were overdue for an overhaul. Today, an estimated 13.85% of households in the U.S. qualify for accredited investor status by either the income or net worth threshold, according to a report by The Brookings Institution. The new certification-based changes will certainly allow more people to become accredited investors, but those additions are still only focused on individuals already in the finance community. The amendments don’t go far enough to expand access to private investments for more Americans who are adequately sophisticated, as our COO and Co-Founder Adam Kaufman recently explained to Commercial Observer.

“We’re here to make investment in CRE more accessible,” Kaufman said in the article. “[The change] only slightly increases things for people in the know, and people with a more acute understanding of the industry. It doesn’t open the net to be drastically more inclusive than that.”

Real estate crowdfunding was founded on the principle of broadening access to institutional real estate deals to a wider group of investors. Many platforms, including ArborCrowd, launch private real estate investments to the crowd using Rule 506(c) of Regulation D and are therefore restricted to accepting investments from accredited investors.

Since its founding less than a decade ago, the real estate crowdfunding industry has already cemented its place in the overall investment market, as the global real estate crowdfunding industry has rapidly grown to an estimated $8.3 billion. The changes to the rule will give those already in the industry — who may have knowledge and expertise to understand the transactions, but don’t have the income to qualify as accredited investors — access to invest. This is certainly a good step in the right direction. However, the industry still has much more room for growth, with a wide proportion of individuals who are financially savvy still being withheld access to many U.S. real estate crowdfunding deals. Therefore, there is a large group of investors who have missed out on investing in traditional wealth building opportunities, because they don’t meet accredited investor requirements.

Of course, we fully recognize the responsibility to protect investors. On many occasions, ArborCrowd has called for more transparency in the real estate crowdfunding industry so investors have a greater ability to clearly understand the risks of every investment. Additionally, we have emphasized the need for more rigorous underwriting of deals before they are launched on platforms. We believe that by taking these steps, we can ensure a better environment for current and future investors, even if they don’t meet certain income or net worth requirements.

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While the SEC’s accredited investor definition changes were not broad enough this round, the actions taken by the commission shows positive momentum and opens the door to the possibility that further expansions may be implemented in the future. The existence of more responsible real estate crowdfunding platforms will only aide in that potential outcome, which would be a boon for the industry. The SEC has merely scratched the surface of what could be done to impact a wider audience of investors, however, its amendments thus far are certainly a positive first step in the right direction.

Read ArborCrowd’s Co-Founder and COO’s full comments in Commercial Observer.