Currently, the only individuals that can participate in commercial real estate crowdfunding are Accredited Investors. If you are new to commercial real estate investing or crowdfunding you may not be familiar with this term so let us explain.
Pursuant to SEC regulations, an Accredited Investor is an individual or organization that has a reduced need for the protection provided by certain securities laws. In general, an Accredited Investor includes institutional investors, as well as individuals that have earned more than $200,000 or more a year ($300,000 if married) for the past two years with a reasonable expectation of making such income in the current year or with a net worth over $1 million, excluding the investor’s primary residence.
The SEC re-evaluates the definition of an Accredited Investor every four years. The net worth benchmarks haven’t been updated since 1982, with the exception of the Dobb-Frank Act in 2010, which excluded a person’s primary residence. At that time, the SEC estimated that at least 8.7 million U.S. households, or 7.4% of all U.S. households, qualified as Accredited Investors.
In 2014, the SEC is in the process of evaluating these standards again. If adjusted for inflation, the SEC and the Government Accountability Office estimates the net worth benchmark would increase to $2.5M and the income benchmark would rise to $450K for individual and $675K for married couples. Tightening the benchmarks undoubtedly would limit the available capital for small businesses and dampen much of the excitement and activity in the crowdfunding space.
Recently, the SEC’s Investor Advisory Committee debated the Accredited Investor standards and recommended a number of alternative criteria. These recommendations included limiting the percentage of an investor’s net worth that could be invested in private placements and developing a test to determine an investor’s level of sophistication.
According to Barbara Roper, Director of Investor Protection at the Consumer Federation of America, “in order for an individual to make reasonable financial investment decisions, they need three things: access to information, sophistication to assess the real risks of the investment and the financial safety net to be able to handle potential losses.”
In July 2014, the SEC addressed regulations for taking steps to verify Accredited Investor status with six Compliance and Disclosure Interpretations. Of the six, the first two address calculating income and assets and the last four discuss methods for verifying an investor’s accredited status including utilizing tax records to certify income, third-party statements, credit reports to prove net worth and written confirmations from registered broker-dealers.
The SEC’s Investor Advisory Committee reconvened and proposed the following recommendations for revising the definition of an Accredited Investor (link to recommendations).
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