The term “accredited investor” was introduced in the Securities Act in 1980, which requested the SEC to create rules to qualify “any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management” as an accredited investor.
Two years later, the legal requirements for an “accredited investor,” were established by the U.S. Securities and Exchange Commission (SEC) in Regulation D for individuals who wanted to invest in securities not registered with the SEC or private securities offerings. The criteria adopted by SEC for these investors included financial sophistication, net worth and knowledge. For real estate investment, people who invest in commercial real estate and real estate syndications must be accredited. Real estate syndications refer to several investors who combine their funds to buy commercial property.
Original Accredited Investor Requirements
Accredited investor regulations are part of Rule 506 of Regulation D, a popular method to raise capital through an exempt offering. Issuers may raise an unlimited amount of capital under Rule 506 if the issuer follows the rule’s requirements, including investor eligibility. Thus, eligibility to invest in a Rule 506 offering is based an investor’s ability to meet the definition of an “accredited investor.”
Initially, this was the list of investors who qualified as accredited:
- High-Net-Worth Individuals
- Brokers
- Trusts
- Insurance companies
- Banks
The SEC created minimum income and total net-worth thresholds for accredited investors. These investors needed a net worth of $1 million or more (or liquid assets) or an annual income greater than $200,000 (or $300,000 jointly with a spouse) to be accredited.
According to the SEC, the definition of an accredited investor is critical to protect investors’ interests. “At its essence, the definition attempts to identify those individuals who are expected to be able to fend for themselves and protect their interests.”
Modifications to Accredited Investor Regulations
Since 1982, the rules have been modified slightly on two occasions. In 2010, the Dodd-Frank Act required the SEC to adjust accredited investors’ total net worth by subtracting the value of primary residences. The adjustment’s main impact was reducing the number of people qualified as accredited investors.
A decade later, the SEC extended accredited investor status to “knowledgeable employees” of nonpublic companies who wanted to invest in their company’s funds. Investment professionals with licenses in good standing, such as Series 7, Series 65, and Series 82, were also added.
In addition, family offices with a minimum of $5 million in assets under management and their family clients were included. The SEC’s regulation states that investments made by the family office must be managed by someone with extensive experience and knowledge in business and financial matters, i.e., the head of the family office can adequately evaluate each investment’s risks and merits.
Thanks to inflation, the number of investors who qualify as accredited investors has grown considerably since 1983. There were 24.3 million U.S. households, or about 18.5% of all households, who qualified in 2022, according to a Securities and Exchange Commission estimate. In 1983, that had been just 1.5 million households, or 1.8%.
There have been actions in the U.S. Senate and House of Representatives to modify the accredited investor rules. In 2023, the House of Representatives passed legislation that endorsed using a standard test to determine if an investor merited “accredited” status, according to the Wall Street Journal. If the individual attained a passing score, then they would be allowed to invest in private securities.
Last October, Republicans on the Senate Banking Committee, led by Sen. Tim Scott (R., S.C.), also proposed a bill to permit investors who passed a financial exam to buy private securities such as shares in pre-IPO startups or loans to private companies. The SEC considers these investments to be riskier. They lack the strict disclosure rules public securities must maintain and can be less liquid to sell quickly.
New Accredited Investor Rule
In March, the SEC issued a no-action letter with guidance about ways issuers can satisfy accredited investor verification requirements of offerings to comply with Rule 506(c) under Regulation D. The SEC letter allows companies to raise capital without independently verifying the purchase’s investor status. According to law firm Nixon Peabody, this non-action letter, “has liberalized the requirements for public marketing of exempt offerings” and eliminated complex investor wealth or income verification requirements. As a result, the regulation change may allow private issuers to increase their public outreach and advertising efforts.
Until now, Rule 506(c)’s regulations included a long list of requirements to confirm that an investor is accredited, including bank statements, verification letters, supplemental written confirmations from an investor’s external advisors, credit reports, or other sensitive documentation, which can be quite burdensome for issuers, or companies such as private equity firms.
The SEC’s clarification could make it easier for issuers relying on Rule 506(c) to make general solicitations to accredited investors. Specifically, the SEC confirmed that an issuer can satisfy the requirements if it takes “reasonable steps” to verify the accredited investor’s status and has a minimum of $200,000 to invest.
The SEC’s new rules state that with natural persons (high-net-worth individuals, distinct from a legal entity like a corporation or organization), the issuer must require a minimum investment of $200,000. The investor must also provide written proof that they are an accredited investor and are not obtaining financing—in whole or in part—by a third party to invest. The new rules are the same for legal entities such as a company or organization, but the issuer must require a minimum investment of $1 million.
Law firm Nixon Peabody’s article about the SEC’s no-action letter states that the recommendations should reduce the “administrative burden placed on issuers seeking to make “General Solicitation Offerings.” The new regulations may also encourage additional issuers and fund sponsors to make solicitations and generally advertise their offerings, even via the internet “without worrying about inadvertently mentioning the previously prohibited descriptions of their offerings or private funds.”
Some barriers still exist for accredited investors who want to have access to private investments, such as investor sophistication, reporting obligations and liquidity, but Nixon Peabody is confident that “this [SEC] Letter will lead to increased General Solicitation Offerings to raise capital from accredited investors in the United States.”
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About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 16-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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