Digital Technology is changing the investment world in lots of ways. One of the ways it’s changing is that the definition of an accredited investors may change. The Security and Exchange Commission (SEC), who make the rules for who is and who isn’t an accredited investor, is considering tightening their rules. Currently, the definition of an accredited investor is a person that has a net worth of a million dollars or more over and above the value of their primary residence, or who has had verifiable income of two hundred thousand dollars a year for two years or more.
Why the change? Well, as I said above, digital technology is changing the investment world and crowdfunding, which relies heavily on digital technology, is moving into the investment world and bringing more money to the same investment opportunities that were previously only available to accredited investors. The SEC is looking at these rules for the first time since 1982. There are about 9 million accredited investors in the United States in 2015. If the rules were set over thirty years ago the dollar values of the rules are way different due to inflation. In other words, a million dollars net worth in 1982 was worth a lot more than it is today. We’ll see what the SEC does.
Why Are Accredited Investors Important?
The entrepreneurial dream in America is to start a business with someone else’s money. Accredited investors are the ideal source of that money. There are all kinds of entrepreneurs among alternative investment start ups; they actively pursue accredited investors. Why? Accredited investors are more dependable and sophisticated as a capital source. That’s why. They tend to know more about the risks of investment and are usually less anxious.
The real problem with alternative investments and investors is the problem of due diligence. The alternative category has less financial information and less regular reporting. An investor is more out there on their own when evaluating an alternative investment. That’s one of the central problems of raising capital for alternative investment start ups.
This problem is beginning to draw attention and creative solutions. Matt Burk, who I’ve written about previously in this blog, has just launched a new division in his business, Fairway America. That division is SBREfunds.com and they are designed to bring accredited investors and new small balance real estate (SBRE) companies together. SBREfund provides a platform for doing due diligence. Accredited investors are attracted by the free information they are provided and the opportunities to ask due diligence questions directly to new start ups and more established businesses as well.
The interactions between accredited investors and alternative investment funds and start ups requires either very sophisticated investors who can gather financial information and background insight about the investment side, or a moderator who is that sophisticated person and can provide guidance. Matt Burk and the Lance Peterson of SPREfund are those moderators. They coach accredited investors about what the right questions are and what the biggest concerns are. They are offering something new in the alternative investment space and it is gaining traction.
More About Accredited Investors
There are new things happening and largely as a result of the way digital technology opens up the investment space. SBRE and real estate investment is, of course, not the only game in town seeking accredited investors. Most of the digital start ups around the country (and especially in Silicon Valley) are also alternative investments. They eagerly pursue angel investors and then venture capitalists, both of whom are by definition accredited investors.
There are lots of hands out when it comes to places to invest money. Are there enough accredited investors to keep the start up space and the various other alternative investment spaces healthy and expanding? That’s why the SEC rule changes are significant. If the SEC makes the rules require much higher net worth then a lot of people will be cut out of these alternative investment spaces.
The financial crash of 2008 was the last time the investment space contracted dramatically. The entire financial world was shaken, as most everybody knows, but the way it happened is significant. It all started with financial rules about mortgage types. As those rules became more and more lax too many people got involved with bad financial arrangements and the banks themselves became predatory. There has been a lot written about it, Freefall by Joe Stiglitz is one of the better books I’ve read about those issues.
Can the SEC’s rule changes be a step in the opposite direction that goes too far? Possibly, the US economy doesn’t need another financial disaster that starts with the rules of the financial community. Fortunately, the SEC advisory committee that met in October, 2014 took into account the needs and concerns of the angel investment community and is interested in expanding the accredited investor class. This committee reports to the SECs top executive decision making team and is likely to influence the final decisions about rule changes. At his point it’s not clear when final decision will be made.