SEC Rule Change Will Have Big Impact on Commercial Real Estate

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Commercial real estate investments have typically been made by high-net-worth individuals. This is partially due to the high price tag of most commercial real estate but is also a result of a rule made back in 1933 by the SEC that requires that only “accredited” investors are eligible to invest in certain types of non-public offerings. Those criteria have changed a bit since then, but basically, they state that to be accredited, an individual investor must earn an annual income exceeding $200,000 (or $300,000 for a married couple) or have a net worth of over $1 million (excluding their primary residence). These rules were established to prevent lower-income retail investors from losing their savings by investing in inherently risky assets.

Now, there are a number of different proposed changes to this accreditation rule, some that would expand the pool of investors that qualify and others that would shrink it. The House of Representatives has already passed a bill (H. R. 2797) that would allow investors to qualify as accredited if they passed a test to prove their financial savvy, even if they don’t meet the income and net worth criteria. The Senate has already read the bill and sent it to the Committee on Banking, Housing, and Urban Affairs, which is expected to vote on it sometime next year.

Conversely, the SEC (the agency in charge of enforcing accreditation requirements) held a meeting of its Small Business Capital Formation Advisory Committee. In that meeting, leadership expressed the desire to increase the hurdle to be deemed accredited, citing the growing amount of investment that is flowing into private companies and the need to index for inflation.

Interestingly, wealth equality has been cited by both sides as an important reason to change the rule. SEC Commissioner Caroline Crenshaw said in a statement, “As you consider this topic, I would like to point out that the House Financial Services Committee recently considered this very issue, and Professor Gina-Gail Fletcher testified that: ‘if the scope of the accredited investor definition is broadened, this will expand the opportunities for wealth extraction and amplify wealth inequality in the country.’”

At the same time, the SEC’s Small Business Forum Report report explained the concerns about inequality that would arise from making the rule more stringent: “It’s important to understand the impact the ability to qualify as an accredited investor has on diverse founders. It’s also important to think about those that want to be investors – investing in early-stage companies that you believe in is a major source of wealth generation.”

New avenues for raising investment from non-accredited investors have been created recently (Reg A and Reg A+ offerings), but they have to comply with each state’s “blue sky” laws, so they still have their restrictions. With two divergent schools of thought around accreditation requirements, it’s hard to say which changes, if any, Congress or the SEC will adopt. Whichever way they decide will have an impact on the pool of investors for commercial real estate at a crucial time for the industry.

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