On August 26, 2020 the Securities and Exchange Commission (SEC) expanded its definition of an accredited investor allowing individuals with certain licenses and professional knowledge to qualify and participate in private capital markets. This means that, for the first time, individuals will be legally permitted to invest in Origin’s private real estate investments not only based on their income or net worth, but also based on established, clear measures of financial sophistication. The new rules will be effective 60 days after being published in the Federal Register, which is expected to occur on October 26, 2020.
Until now, the rules stated that an accredited investor was defined as an individual with more than $1 million in net worth, excluding the value of that individual’s primary residence, or an individual who earned more than $200,000 per year in each of the last two years. Additionally, a married couple could qualify as an accredited investor with an annual income of $300,000 per year in each of the last two years.
The original rules were created before private investments were as accessible online as they are today and were designed because information on private investment offerings used to be more opaque than those available in public markets. It’s true that public companies are subject to a higher standard of information disclosure and reporting, but that doesn’t make a public security any more or less risky. Proper due diligence on behalf of the investor is critical whether an investment is public or private.
To this day, information on certain private investments may be tough to access, but at Origin, we understand the importance of information disclosure, which is why all documentation for our fund offerings is easily downloadable through our online portal and documents such as audited financial statements and quarterly reports are provided upon request. Additionally, our co-founders frequently host webinars to update investors and always provide time for both current and prospective investors to ask questions.
Bottom line, the recent rule changes for an accredited investor are saying that wealth and income are not always the best way to determine the sophistication of an investor. Many investors have the investment acumen but weren’t allowed to participate in certain investments simply because they hadn’t accumulated the wealth or income required. The new rule accommodates these investors and adds two new categories designed to allow more financially sophisticated individuals to participate.
The first new category of an accredited investor is “licensed persons,” which includes individuals who hold certain professional certifications, designations and other credentials. Qualifying certifications include Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65) and Licensed Private Securities Offerings Representative (Series 82) certifications. The amendment includes a list of attributes that the SEC will consider in determining which professional credentials will qualify, which gives the SEC some flexibility to make additional designations over time. “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,” said SEC Commissioner, Hester Pierce.
The second new category of accredited investor is “knowledgeable employees.” Under the amended rule, “knowledgeable employees” qualify as accredited investors for purposes of investing in the funds sponsored by their employers. “Knowledgeable employee” is generally any executive officer or person serving in a similar capacity or an employee who regularly participates in the investment activities of a fund and has been doing so for at least 12 months.
While these amendments are limited in scope, the recent changes appear to be a first step towards a larger goal of allowing a wider range of individuals to participate in private investment offerings. At Origin, our goal is to change the way individuals invest in real estate and it’s encouraging to see the SEC start making changes that align with our vision.