The SEC just changed Accredited Investor Definition. The biggest news in investing for years.

On August 28th, the SEC made a huge announcement that could change the way we invest forever.

Since the Securities Act of 1933 was passed, regular investors has been locked out of the private markets. This means only the super wealthy could invest early in companies like Facebook, Apple and Amazon.

WHY WERE REGULAR INVESTORS EXCLUDED FROM INVESTING AND GENERATING HUGE RETURNS LIKE THE HIGH-NET WORTH INDIVIDUALS?

According to the SEC guidelines, they didn’t have enough money to be recognized as an “accredited investor”.

SEC chairman, Jay Claton has been working to get these archaic laws changed to allow investors of all incomes to invest early in pre-IPO companies regardless of income.

“Today’s amendments are the product of years of effort by the Commission and its staff to consider and analyze approaches to revising the accredited investor definition,” said Clayton.

“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”

The accredited investor definition was originally put in place to protect investors from harm, determining “financial sophistication” solely based on income or net worth doesn’t make much sense.

Chairman Clayton agrees:

“[W]e do not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition. Rather, the characteristics of an investor contemplated by the definition can be demonstrated in a variety of ways.”

These include the ability to assess an investment opportunity — which includes the ability to analyze the risks and rewards, the capacity to allocate investments in such a way as to mitigate or avoid risks of unsustainable loss, or the ability to gain access to information about an issuer or about an investment opportunity — or the ability to bear the risk of a loss.”

THE NEW ACCREDITED INVESTOR DEFINITION OPENS UP A LARGER POOL OF FINANCIALLY SOPHISTICATED INVESTORS AND WILL OPEN FURTHER DEFINITION IN THE FUTURE.

  • The certification, designation, or credential arising out of an examination or series of examinations administered by a self-regulatory organization or other industry body, or is issued by an accredited educational institution;
  • The examination or series of examinations are designed to reliably and validly demonstrate an individual’s comprehension and sophistication in the areas of securities and investing;
  • Persons obtaining such certification, designation, or credential can reasonably be expected to have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of a prospective investment; and
  • An indication that an individual holds the certification or designation is made publicly available by the relevant self-regulatory organization or other industry body.

REG D INVESTING WILL BECOME A HUGE INVESTMENT VEHICLE IN THE FUTURE.

Reg D investing is the best way for accredited investors to build wealth, through mini-ipo.

Under Rule 506(c) of Regulation D, a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:

  • The investors in the offering are all accredited investors; and
  • The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

Purchasers of securities offered pursuant to Rule 506 receive “restricted” securities, meaning that the securities cannot be sold for at least six months or a year without registering them.

accredited investor Reg D

Real Estate Investors looking for Reg D investments

THE DIFFERENCE BETWEEN RULE 506 (B) AND 506 (C) FOR REG D REAL ESTATE INVESTORS

With the Jumpstart Our Business Startups (JOBS) Act passing back in 2012, it is easier for non-accredited investors to invest. Most importantly, it was important for private offerings – it lifted an 80-year ban on public solicitation of private investments. Companies using Regulation D (Reg D) to raise capital are able to raise funds from accredited and non-accredited investors. For those who are confused about what that is, read this article about the basics of Reg D, and specifically Rule 506 of Reg D.

Reg D is a regulation governed by the SEC, maintaining private placement exemptions. This is opportunistic for smaller companies, as they can raise capital both faster and cheaper than releasing their company to the public. It allows capital to be raised through equities and debt securities without needing to register them with the SEC. One must still follow the requirements required by the state and federal government.

Companies and Investors must still follow guidelines, fill proper paperwork, and disclose important information. Companies must fill out a “Form D” electronically with the SEC. Although one must fill out the Form D, it is far less tedious than preparing for a public offering.

The company offering the private security must also provide disclosures about any “bad actor” events within the timeframe of issuing the security.

Importantly, Rule 506 of Reg D gives two distinct exemptions for companies offering securities. Through these exemptions, companies can raise an unlimited amount of money.

Rule 506(b) Reg D Offering

Rule 506 (b) is for an unlimited number of accredited investors and up to 35 non-accredited investors, who are labeled as “sophisticated”. To be a sophisticated non-accredited investor, one must have sufficient knowledge and experience in business and financial situations. By having said knowledge, they can be trusted to evaluate the cost-benefit analysis of a potential investment.

Under Rule 506 (b), the company offering the securities is not able to use general solicitation to advertise. Also, companies decide on what information they choose to disclose, so long as it doesn’t go against anti fraud regulations, and doesn’t include any false and misleading information. The company must be available for questions from potential investors.

Rule 506 (c) Reg D Offering

Reg D 506(c) is for accredited investors. Rule 506(c) of Reg D investments states that companies can broadly solicit and generally advertise a private offering, and still be within compliance of the requirements. It does state some prerequisites, such as requiring all the investors in the offer to be accredited investors and requiring the company to take the necessary and reasonable steps to verify the accredited investors.

If someone purchases securities related to the Rule 506 are given “restricted” securities – meaning those securities cannot be sold for at least six months to a year.
Rule 506(c) of Reg D also means that investors may invest immediately into a project, instead of waiting the cool-off period. An unlimited amount of investors may invest, raising an unlimited amount of money.

Another important event is the signing of the $2 trillion Coronavirus Aid, Relief, and Economics Security (CARES) Act. It allows grants and loans equal to 10% of the country’s economy. It could lead to tax breaks for potential investors, as well as support for smaller businesses.

Opportunity Zones

To qualify for the benefits that Opportunity Zones reap, one must reinvest one or more capital gains in a Qualified Opportunity Fund. This is described as an investment vehicle organized as a corporation that holds 90% or more of its assets in a qualified opportunity zone property, rather than another qualified opportunity fund. There are three tax benefits to reinvesting capital gains in a Qualified Opportunity Fund: first, there is a temporary tax deferral on any gains in a qualified opportunity fund within 180 days of realization; second, there is a 10% step up in basis for gains reinvested in a qualified opportunity fund if the investment is held for five years; third and finally, investors who invest in a qualified opportunity fund can exclude permanently from taxation any capital gains that accrue after their investment in a qualified opportunity fund, if the investment is held for at least 10 years.

In short, Reg D is something that needs to be looked into. The opportunities of investing through Rule 506 means that companies can raise unlimited funds through accredited and non-accredited investors by offering private securities through equities and debts. Rule 506(b) allows for an unlimited number of accredited investors and a maximum of 35 investors; Rule 506(c) is only for accredited investors, but the company can generally advertise their offerings to said investors. Additionally, the CARES Act offers tax refunds for those investing in businesses, as well as mortgage forbearance and an increase in grant funds. It is a very viable form of investing, and it benefits smaller companies as it allows those companies to raise the maximum amount of funds needed for operation at a cheaper cost. Overall, it is important for investors to take advantage of this opportunity to maximize their returns.