Licensed professionals have the expertise to invest in crowdfunding deals.
The definition of an accredited investor may be shifting soon, and it should. The SEC currently defines an accredited investor as one who earns $200,000 or more in annual income ($300,000 for couples) or has a net worth of at least $1 million, not counting a primary residence. These investors are thought to have sufficient expertise to judge the risks and rewards of alternative investments, such as real estate and private equity. Until recently, only accredited investors were allowed to invest in private placements and equity crowdfunding offerings. Now the SEC is taking a fresh look at the definitions of an accredited investor while finally implementing crowdfunding regulations that allow non-accredited investors to join in the action.
In the words of the SEC, the current investor net worth and income standards “oversimplify the factors that determine whether an individual truly has the wealth and liquidity to shoulder the potential risks of private offerings.” I agree, and find it ironic that there are many traders, advisers, attorneys or brokers – in some cases literally making their living advising clients on private investments – who aren’t allowed to themselves invest because they don’t meet the income or net worth requirements. I’ve also seen professional real estate investors with substantial incomes have to jump through hoops in order to verify themselves as accredited investors because they aren’t necessarily W-2 employees.
The result is an unnecessary and unproductive restraint on the raising of private capital. I urge the SEC to supplement the current income and wealth qualifications with ones that accommodate an investor’s experience, education and credentials. Professionals such as licensed attorneys, realtors, and Certified Financial Analysts should be allowed to participate in private placement offerings regardless of wealth or income. While the new Regulation A+ is a good first step, I would recommend that the SEC explore ways to expand the participation of non-accredited investors in Regulation D equity offerings as well. Who is to say that a high-income person has any better investor knowledge or prudence than those operating with less wealth? Is someone who wins $50 million in the lottery any more qualified to make private investments than accountants or transactional lawyers who earn $195,000 per year? Does a senior engineer for Google know more about a real estate development project than an analyst at Related?
Dodd-Frank requires that Congress regularly review the definition of accredited investor. I call upon Congress to take the steps necessary to replace the current definition with a fair-minded approach that takes into account today’s financial realities. I don’t advocate scrapping all income and wealth tests, because there are always bad actors awaiting the opportunity to defraud an investor – although I’d venture that most con artists concentrate on wealthier accredited investors because, as they say, that’s where the money is. More importantly, I have great faith in the open marketplace of crowdfunding to drive away bad actors. Crowdfunding portals that repeatedly get involved with dishonest sponsors will soon find themselves exposed to scathing criticism on the Internet – the public is self-policing after all. Chances are these kinds of portals will soon find themselves out of business and under (deserved) scrutiny by the SEC.
No matter how noble its intentions, the accredited investor laws are not accomplishing their goals and are instead “protecting” people who need no such protection. A licensed realtor may not be wealthy but probably has an excellent understanding of the risks and rewards of property investing. In fact, all sorts of non-accredited individuals have the necessary knowledge and experience to protect themselves quite well in the investing arena. Let’s give everyone a fair shake and open the doors to private investments, with suitable constraints based upon income and wealth. Not only will small businesses and realty projects prosper, but so will the very investors these laws try to “protect.” The true democratization of investing opportunities is close, and I look forward to the next steps.