September 9, 2020

JF2199: SEC Modernizes the Accredited Investor Definition | Syndication School with Theo Hicks

TRIn today’s Syndication School episode, Theo Hicks, will be sharing the SECs recent expansion on the definition on what a “Accredited investor” is. There are two types of people who can invest in syndications; the sophisticated investor, and the accredited investor. Today we will focus mainly on the accredited investor definition.

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit Thank you for listening and I will talk to you tomorrow.

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Theo Hicks: Hello, Best Ever listeners and welcome to another episode of The Syndication School series – a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air a syndication school episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes, we’ve released some free resource. These are free PDF how-to guides, free PowerPoint presentation templates or free Excel templates that will help you along your apartment syndication journey. So make sure you check out other episodes and those free documents at

In this episode, we are going to talk about the SEC’s recent expansion on the definition of what an accredited investor is. So as a refresher, the two types of people who can invest in apartment syndications are going to be the accredited investor and the sophisticated investor. We’re gonna focus more so on the accredited investor in this episode, but the sophisticated investor is someone who does not meet the accredited investor qualifications but has sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. So if you are raising money under 506(b), then you are allowed to raise from up to 35 of these sophisticated investors, assuming you have a pre-existing substantive relationship with them. So to learn more about that, you can check out our syndication school episode where we go into more detail on 506(b) versus 506(c). But if someone is an accredited investor, they can invest in any apartment syndication. They can also invest in crowdfunding as well, which I had a really good interview with someone about crowdfunding yesterday, that I’m sure I will be discussing on syndication school at some point. But still, currently today, because this is a new definition, it does not go into effect. I think they released it at the end of August and they said it’ll go live in 60 days. So by the end of October, this will go live. So technically right now, you’re still only allowed to raise from accredited investors who are qualified under the old definition.

So as a reminder, the old definition is going to be someone who has an income that is greater than $200,000 per year. Or it could also be $300,000 combined between an individual and their spouse in each of the prior two years, and then it reasonably expects the same for the current year; so you can qualify with your income. And then the other most common way to qualify is to have a net worth over a million dollars, whether that is as an individual or with a spouse, and then this excludes the value of the personal residence. So they can’t use the equity in their house or whatever to count towards their accredited investor status.

And then there’s a few others that might be relevant to you when you’re raising money, because sometimes people want to invest through an entity. So any entity in which all of the equity partners are accredited investors will also qualify, and then any trust with total assets in excess of $5 million does not form specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, is allowed to also invest. A broker who’s not accredited can invest on behalf of a trust that meets these requirements. So there’s a long list of other ways people can qualify to become accredited. If you just go to the IRS website… I’m pretty sure it’s under regulation D. You’re going to find all of the different ways people can qualify.

Now as I mentioned, the SEC have recently changed the definition. I guess some people were fearful that the definition would become less; it would be limited. But anyone who is an accredited investor today was an accredited investor yesterday and last year is still going to be an accredited investor once this new definition comes into effect in October. So this definition only adds new accredited investors, not removing any accredited investor. So that’s the good news. But the bad news side is that it was not expanded that much. So the first expansion was people who had Series 7, Series 65 or Series 82 licenses are now technically considered accredited investors. Also, investment advisors registered with the SEC or any state. And then something that was surprising was that venture capital fund advisors and exempt reporting advisors now qualify as accredited investors, which is interesting, because if you remember what I said prior that – a sophisticated person, an investment broker… So talking about the sophisticated person who’s not an accredited investor who can invest on behalf of a trust.

By sophisticated, it means the person or the company or the private fund offering security reasonably believes that this person has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment. So the exact same as the definition of the sophisticated investor that could invest in 506(b).

So the main point here is that the individual needs to be sophisticated in order to invest in the syndication, whereas a venture capital fund advisor and then exempt reporting advisors are not required to pass any exam or demonstrate any financial knowledge or sophistication. So this seems to be the first, if not a rare example of someone who’s allowed to invest without needing to meet the old accredited or the old sophisticated requirements.

A couple of other additions, expansions to the accredited investor definition – LLCs that are otherwise qualified can invest just because the LLCs were started after the existing regulations on who is or isn’t an accredited investor came to be. So it’s just adding that in there. Entities not currently listed, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries that 1) own investments and then investments in excess of $5 million and 2) were not formed to invest in the securities offered, meaning they were pre-existing, rural business development companies, family offices with at least $5 million in assets under management and their family clients, as each is termed under the Investment Advisors Act of 1940. So if you remember, we did an episode recently about family offices. So I think maybe that they just reduced the assets under management, maybe… Because I didn’t know that you could raise money from family offices before.

And then the last one are knowledgeable employees of a private fund, but only with respect to investments in that fund. So this last one, essentially what this means, is that individual and institutional investors that have the knowledge and the expertise to participate in private capital markets, which includes apartments syndications, now qualify as accredited investors based on defined measures of professional knowledge, experience or certifications. So rather than just them needing to meet a certain income or net worth or assets under management, they can also qualify as an accredited investor based off of a sophisticated status. Maybe in between or who have a little bit more experience than a sophisticated investor, then they will qualify as an accredited investor.

And then the last thing is that currently, the net worth and liquidity is based off of your spouse. So you have to be actually legally married, whereas now, the definition expanded to someone that you’ve been a cohabitant, occupying a relationship, generally equivalent to that of a spouse for at least seven years. Now, this obviously isn’t a massive change, but it could be an indication of bigger changes to come. And then also especially, this last example where people can qualify with different designations/credentials, so they don’t actually have the liquidity or net worth, is going to open up industry self-regulatory authorities and accredited education institutions to create various certifications, designations or credentials or courses that the SEC would approve for accredited investor qualification.

So someone can take some course and then get a certificate that will allow them to be a accredited investor, which obviously would lead to a lot more people learning about securities, and then being able to participate in apartments syndications and crowdfunding, which is obviously something that could be massive and tap into a massive portion of the population that can’t invest now because they lack the knowledge, expertise or the money.

So I would say out of all of these changes, the LLCs might be helpful. People can invest with an LLC now instead of an LP or something. But this last one where people who have certain certifications are allowed to invest, people can create new certifications that are approved by the SEC. So this is why it’s very important that you get the word out about what you’re doing… Especially now, even if the people you have a pre-existing relationship with don’t know about apartment syndications or aren’t qualified to invest in apartment syndications, because once these qualification courses start coming out, they can take those and be allowed to invest.

So if you want more info about the SEC release, their press release is on August 26, if you just google “SEC modernizes the accredited investor definition fact sheet”, you’ll go to the page that goes into more details, and then there’s obviously a lot of blog posts that have been written about it as well. You don’t technically need to go read the facts. I’ve summarized it pretty well in this episode, but if you want to read the more legal jargon as opposed to the laymen terms that I just gave you, then you can go check that out again. That’s “SEC modernizes the accredited investor definition”. So that will conclude this episode. Thank you for tuning in. Make sure you check out those other episodes and download those free documents at, and until next time, have a best ever day.

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