“Changes at the S.E.C. in ‘Accredited Investor’ Status”
/By Brett P Holmes, Managing Partner
Maybe you missed the announcement from the Securities & Exchange Commission (S.E.C.) last week regarding its plan to modify the formal (and clearly outdated) definition of an "Accredited Investor" (Press Release HERE). We just wanted to briefly highlight the details, why the sudden change, and what it means for private real estate investors.
Basically, until now, private investment offerings such as ours could only be legally invested in by qualified "accredited investors", per the SEC definition. For the most part, this meant that individuals making over $200,000 per year and/or with a net worth of more than $1 million. There are some other qualified investors such as trusts, registered investment advisors (RIA’s), pooled capital entities, etc, but the main takeaway is that private investments were reserved for individuals or families who could "bear losses" (or wealthy people).
Therefore, non-accredited investors could only invest in publicly traded investments such as stocks, bonds, REIT's, ETF's, etc. Over the last couple of decades, however, many companies (particularly in tech, aka: half the economy) have been waiting longer and longer to IPO. Meanwhile, private funding (venture capital and private equity) has become more accessible and the wealthiest investors with VC and PE holdings have enjoyed the gains.
For example, in 1997 when Amazon went public, it was only 3 years from its founding and it had a valuation of about $438 million. It had only raised about $100 million across 2 rounds of funding prior to its IPO. Therefore, IPO investors enjoyed substantial gains as the company has now grown by more than 3,500x since its IPO! By comparison, last year when Uber went public, it had been a company for 10 years and raised nearly $12 billion over 25+ private rounds of funding! When it went public at a whopping $70 billion valuation, IPO investors took losses.
These are extreme examples but it illustrates a key point that the S.E.C. is finally acknowledging; That public markets do not enjoy the same wealth creation as before while private markets (or wealthy investors) have experienced most of these gains. In fact, this comes at a time when a myriad of “unicorn” ($1B+) companies plan to hit the public markets after tremendous gains in the private markets. These include China’s Ant Group (at $250B+, what), Robinhood, Instacart, Airbnb, Wish, Asana, Palantir, and more!
Therefore, the S.E.C. is continuing to make changes to slowly provide access for individual investors. This process began with the crowdfunding changes in Regulation D under the 2012 JOBS Act. This next step which will go into effect in 60 days. While it’s still unclear exactly how the S.E.C. will determine who possesses the “professional knowledge, experience or certifications” to invest, we are excited to see some movement in much outdated rule (dates back to the Securities Act of 1933 intended to “protect” investors following the Great Depression).
And finally, what does that mean for private real estate investing? It just means that a lot of people with the financial knowledge and understanding (or the “sophistication”) to invest in projects like ours - but maybe not the qualified wealth - can now legally make those investments. We are optimistic that this rule change will have a positive impact on the democratization of investing and we’ll keep everyone updated with further updates!
Brett P Holmes, Steel City Management LLC