New Accredited Investor Definitions Make Finding Investors for Real Estate Syndication a Breeze

Real estate syndication just got more comfortable with the passage of new accredited investor definitions by the SEC on December 8th, 2020. For years, the SEC has danced around the idea of adding new definitions, thereby potentially increasing the available pool of accredited investors for issuers of Rule 506(c) offerings. After many open forums and discussions, the SEC added definitions that industry leaders have lobbied for many years. Let us discuss how these new changes will benefit real estate issuers and investors alike.

 As discussed in previous blogs, many new methods were added to the accredited investor requirements. Here is a breakdown of the methods relevant to real estate investing:

•      The SEC deems “natural persons” with specific certifications, licenses, and other credentials to be “financially sophisticated” enough to qualify as accredited investors. Accepted certifications from accredited educational institutions will initially include the Financial Industry. Regulatory Authority, Inc. (FINRA) Licensed General Securities Representative (Series 7), Licensed Investment Adviser Representative (Series 65), and Licensed Private Securities Offerings Representative (Series 82).

•      "Knowledgeable employees" of venture capital or private equity funds would be permitted to invest in those particular funds without meeting the income or net worth tests typically required of accredited investors.

•      Additionally, although somewhat subtle of a change - “The spouse definition has been amended to include “spousal equivalent” when combining income to meet the $300,000 USD income requirement or the $1,000,000 USD net worth requirement” This still opens up more investors in more diverse spousal situations to engage with Rule 506(c) offerings.

Instead of relying on existing relationships, issuers may want to consider the open solicitation given to them by switching to Rule 506(c) offerings. All of these new definitions benefit the Rule 506(c) side of the Regulation D 506(c) vs 506(b) debate. Real estate syndications should consider using Rule 506(c), which with the ever-increasing investor pool allows for even more excellent outreach opportunities and even larger real estate projects. The potential for a massive funding opportunity is almost too hard to resist with these added accredited investor definitions.

 Another understated benefit of the license holder definition is the reduction of challenging onboarding of investors. With these knowledge persons added to the investor pool, less education would be required in the investment process. With less education of new investors to deal with, resources can be allocated elsewhere. The SEC has left open the potential for added additional professionals to the knowledge pool, so taking advantage of this investor base early and following the future expansion will be very beneficial.

With so many new opportunities to increase your pool of investors, it has never been easier to use Rule 506(c). With third-party verification services, the process of making sure your investors meet the accredited investor requirements can be completed with ease. If you have ever asked the question, “How do I verify accredited investors?” The answer is to use a third-party service; this reduces the amount of time and effort your firm needs to pay your legal team to conduct internal reviews. Additionally, using a third-party reduces accusations of bias. Using a service like VerifyInvestor.com is very simple and straightforward. Let them take care of the verification aspects so you can focus on finding more investors in the recently increased accredited investor pool. Follow our blog for the latest information on accredited investors and the finance industry as a whole in 2021!