New “accredited investor” definition took effect December 8, 2020
On October 9, 2020, the Securities Exchange Commission (SEC) made unregistered securities offerings even easier.1See the Federal Register document number 2020-19189. For real estate investors looking for new investors, this is great news! The new rules took effect on December 8, 2020.2See the Federal Register document number 2020-19189.
Unregistered Security offerings are often limited to accredited investors.
Regulation D always permitted the sale of unregistered securities to “accredited investors.” An accredited investor was a person or entity that was considered to be sophisticated or otherwise able to absorb the harm from high risk investments.317 CFR 230.501, subd. (a) The most popular definition (and most referenced definition) defines an accredited investor as a person with net worth over $1 million (excluding their primary residence) or a person making more than $200k per year ($300k per year if married) were classified as “accredited investors.”417 CFR 230.501, subds. (a)(5) and (a)(6). Under this definition, real estate investors could offer investment opportunities to neighbors, friends and family (as long as they qualified them first under the income criteria).
Now, the income/wealth requirement is gone from some of the accredited investor status options
Under the new rules, many more classifications were added, but the one that I believe will be the most widely referenced is the addition of any person with a Series 7, Series 65, or Series 82 license.517 CFR 230.501, subd. (a)(10); see also SEC article “Amendments to Accredited Investor Definition.” Under this new rule, an accredited investor no longer requires minimum income or asset valuations. Any person wishing to be an “accredited investor” to take part in an investment opportunity may do so by taking the one of the SEC approved exams and passing.
This new rule instantly added more than 624,674 people to the list of potential investors.6FINR reports 624,674 registered licensees at the end of 2019.
Series 7 is an entry level certification.
I predict that the series 7 license will likely become a popular option for the late-comer who now has money to invest but is bared from many local offerings by the lack of an “accredited investor” status. The series 7 exam is considered the “starting point”7“Taking and passing the Series 7 Top-Off Exam is necessary for launching many financial industry careers.” (“How to Get Sponsorship for the Series 7“) for many financial services careers. Sites like Knopman.com publish instructions on how to find an exam sponsor and instructions on how to most quickly pass the Series 7 test within just 120 days.8See “How to Get Sponsorship for the Series 7“
Although the series 7 (“stockbroker’s license”) is considered the longest and toughest of the financial exams, most people unfamiliar with finance have not heard of the series 65 license (required to give financial advice) or the series 82 license.9See “Breaking down securities licenses” by Investopedia.
Update your mailing list
Start adding licensed financial professionals to your mailing list, because you can now solicit them with Regulation D offerings. This expands your potential reach. As a double benefit, these licensed professionals also are more likely to be able to share your investment opportunities with accredited investors on their own lists. Make your prospectus attractive, informative, and accurate; and go find your investors!
I’d love to hear your thoughts in the comments below.
- Did you take the series 7, what did you think of the test?
- How likely is it that aggressive investors will shuttle potential lenders into series 7 exams so that they may become “accredited”?
- How would you use this new information to improve your investment-based business?
Share your thoughts below!
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