This week was a crazy one that no one was expecting. A group of retail investors on a Reddit community called Wall Street Bets decided to take on the "big guys". Using the power of numbers, they selected GameStop, a stock that was heavily shorted by major hedge funds including Melvin Capital and started a buying spree. After driving up the price of GameStop, they moved on to AMC, Bed Bath & Beyond, Nokia and other stocks that were also heavily shorted by hedge funds. The reason - they saw an opportunity to finally get their fair share of profits.
The result was losses and gains in the magnitude of billions of dollars in a matter of days. The exchanges stepped in to try and control the chaos. Robinhood and other brokerages put in limits on what retail investors could buy/sell. Attorneys stepped in with class action lawsuits. The White House and the SEC stepped in saying they will initiate investigations.
There are plenty of news articles on the details so we won't get into that. But this week does matter to all retail investors, including real estate investors, and here's why. The calls for more regulation have started and those regulations impact not just the stock market but also the commercial real estate market.
While Avestor believes that regulations are important to protect investors, we also believe that ALL investors should have the ability to participate in their fair share of profits. Sometimes, regulations do the opposite of their original intent. Instead of protecting the little guy, they hurt them.
A Historical Example
A regulatory example that we deal with every day at Avestor is the SEC regulation around accredited investors. This regulation was put in place decades ago (1933 to be exact after the stock market crash of 1929) to "protect the little guy". After the crash, the SEC put in significant regulations around public companies and the stock market. Since private offerings were not regulated, they created the accredited investor definition. If a retail investor had a certain amount of money, they could participate in private offerings. Otherwise, a retail investor could only invest in public companies that were regulated by the SEC. The belief back then was that investors above a certain income/net worth threshold were smarter so they could decide if a private offering was too risky. That definition still holds. To participate in private offerings today, the SEC requires individual income at $200,000 a year, joint income at $300,000 a year or net worth over $1,000,000 or you must pass an SEC approved investment exam. You can read our other blog article to learn more about accreditation.
So what did this 1933 regulation do? It created a barrier that prevented retail investors from participating in commercial real estate offerings that were primarily private offerings. For the next 80 years (until the JOBS Act of 2012), small, less wealthy retail investors had no opportunity to participate in commercial real estate deals.
The result - trillions of dollars of profits from commercial real estate went to the wealthy investors. The regulation that was meant to protect small investors resulted in the wealthy getting significantly more wealthy. The JOBS Act in 2012 finally opened the door a little with new crowdfunding options but many real estate investment opportunities including traditional real estate syndication deals still mandate investors to be accredited.
SEC Process for Setting Rules
SEC has a difficult job of balancing regulation with free markets. It's important for retail investors to understand how the SEC creates regulations. At the most simple level, the SEC first creates Concept Releases or Proposed Rules. Concept Releases solicit the public's views on securities issues so that the SEC can better evaluate the need for future rulemaking. Proposed Rules are actual rules that the SEC seeks investor input before they become final.
All investors are provided an opportunity to officially comment on concept releases and proposed rules for a small period of time (around 90 days). The SEC then takes in all comments and sets the final direction.
To view the latest SEC proposed rules, you can go to the SEC website.
Why Retail Investors Should Pay Attention to SEC Proposed Rules
So who pays attention and provides comments to SEC proposed rules? Big Wall Street investors, family offices, hedge funds and their attorneys, private equity and their attorneys and others that want to influence how regulations gets set. The SEC then takes in all the comments it receives and develops final rules based on those comments.
So if all the investor feedback that the SEC receives is from the wealthy or those that represent the wealthy, I'm sure you can guess what happens.
Avestor will do our Part
Avestor tracks SEC regulations very closely. We believe it's critical for future regulations to provide ALL investors the opportunity to gain wealth, not just a limited set of investors. We will continue to provide inputs to the SEC when new regulation arrives to ensure that we support more opportunities for retail investors.
And finally, when we see a regulation that we believe will hurt retail investors to benefit of the big guys, we will ask you to participate and provide feedback directly to the SEC during their comment period so your voice is heard loudly.
Billions of dollars were won and lost this week. There were winners and losers. There will be pressure for investigations and rule making to protect the "little guys".
It's important that retail investors participate in how the future regulations are set to ensure fair and open markets for all. Otherwise, we risk seeing more regulations that could actually limit retail investor opportunities. Once regulations are set, they impact retail investors for many decades to come, similar to the way investor accreditation rules from 1933 still limit a majority of retail investors from participating in real estate deals.
If you like this article and agree with us, please share it on your social media feed. Thanks and may the force be with the "little guys".