The Securities and Exchange Commission (SEC) regulates private offerings in the United States. Many private real estate offerings are filed under a regulation called Regulation D. The regulation requires investors to be Accredited Investors to participate in these offerings.
On August 26, 2020, the SEC took a small, but important first step in changing the Accredited Investor definition to make private investments more accessible. Read on to learn more.
A Little Background
Before the adoption of these new rules, the SEC defined an investor as "accredited" purely on the basis of their wealth. For most individual investors, qualifying as an accredited investor requires showing sufficient annual income or total assets.
Income - to qualify, individual income must be over $200,000 or over $300,000 as joint income with your spouse, in each of the two most recent years.
Assets - to qualify, current individual or joint net worth must be over $1,000,000. Your primary home value could not be included in the net worth calculation.
If an investor met the above requirements, they were part of the "In Crowd" giving them access to private offerings. Even if an investor was financially very savvy, but not wealthy, they had no alternative way to qualify.
In the latest ruling, the SEC took the first step in expanding the guidelines. While a small step, its an important one. In their latest ruling, the SEC stated the following:
"The SEC does not believe wealth should be the sole means of establishing financial sophistication of an individual for purposes of the accredited investor definition....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 SEC received significant inputs to expand the definition to include professional certifications, including certain qualified university degrees (i.e. MBA), as an alternate method for an investor to qualify. One of the key issues that the SEC considered was how an issuer of a private offering could verify if an investor had the credentials. Determining if an investor was an MBA, for example, would require the issuer to verify with the investor's university to validate the degree.
The SEC decided it was best to take a measured approach to opening the door to investors that do not meet the wealth guidelines to still qualify. Moving forward, the SEC will recognize any investor that has passed the Series 7, Series 65 or a Series 82 exam as an accredited investor regardless of their wealth. These exams are nationally recognized and an issuer of a private offering can verify if an investor has passed the exam.
Interested in taking the exam. Read on.
Getting Accredited by Exam
As an investor, if you don't qualify through income or assets, then you now have an opportunity to still become an accredited investor by passing either the Series 7, Series 65 or Series 82 exam. These exams are administered by FINRA and are nationally recognized.
So first lets talk about each exam:
Series 65 - passing this exam qualifies someone as an investment adviser.
Series 7 - passing this exam qualifies someone to have a securities license.
Series 82 - passing this exam qualifies someone to be a private securities offering representative.
So which exam should an investor take to then qualify as an accredited investor? Our recommendation would be to take the Series 65 exam.
We don't recommend the Series 7 and Series 82 exams since they both have a prerequisite of another exam. An investor must first pass the Securities Industry Essentials (SIE) exam to qualify for the Series 7 & 82 exams.
Is the Series 65 exam simple? Absolutely not.
Can you pass the exam on your first try? Absolutely!
Taking the Series 65 Exam
The Series 65 exam is a 3 hour exam with 130 questions. You must answer 94 of the 130 questions correctly to pass this exam (~72%). The cost of the exam is $175.
To learn more about the exam, you can visit the FINRA website at the following address. https://www.finra.org/registration-exams-ce/qualification-exams/series65
There are a large number of study guides available as well as online classes for Series 65.
For tips on which Series 65 study guides or online classes to take, reach out to us at firstname.lastname@example.org and we can provide you some recommendations.
In summary, we are excited to see the SEC making changes to the definition of an accredited investor to enable more investors to participate in private offerings. While not fully opening the door yet for any type of educational qualifications, the SEC is seeking feedback from investors for future revisions.
We hope this quick overview was helpful in providing investors a new option for becoming an accredited investor when income/assets based qualification is not possible. With this qualification, you will have access to a whole new world of real estate investment opportunities.