The Capital Stack
In the past, we’ve undertaken numerous small investments with friends and family under Reg D 506(b). We’ve also explored Reg D 506(c), which only allows accredited investors into the investment. The significant distinction is that with a 506(b), we cannot publicly promote the investment. If you are signed up for our newsletter but not our investor portal, you won’t hear about the 506(b) investment until the opportunity is no longer available. On the other hand, with a 506(c), we can openly discuss the investment and will notify our newsletter subscribers after providing the opportunity to the members of our investor portal. Because we raise with both 506(b) and 506(c), we encourage both accredited and non-accredited investors to sign up for our investor portal and schedule a call so we can start to build a relationship. It’s free to sign up and only takes a few minutes.
Accredited VS Non–Accredited
Definition: An accredited investor is an individual or entity that meets specific financial criteria, making them eligible to participate in certain investment opportunities that may have higher risk and complexity.
Criteria: In the United States, the criteria for individual accredited investors include having an annual income of at least $200,000 (or $300,000 jointly with a spouse) for the last two years with an expectation of the same income in the current year, or a net worth exceeding $1 million, either individually or jointly with a spouse (excluding the value of the primary residence).
Entities: Certain entities, such as trusts, corporations, and partnerships, can also qualify as accredited investors based on their net worth or financial sophistication.
Definition: A non-accredited investor is an individual or entity that does not meet the specific financial criteria established for accredited investors.
Access to Investments: Non-accredited investors may have limitations on participating in certain types of investment opportunities, particularly those considered higher-risk or offered through private placements. These limitations are intended to protect less financially sophisticated investors from potential risks.
Regulatory Protections: Securities regulations often impose stricter disclosure and registration requirements for offerings targeting non-accredited investors to ensure they are provided with adequate information before making investment decisions.
Currently, the distinction between accredited and non-accredited investors is based on financial qualifications, with accredited investors having higher income or net worth thresholds. Accredited investors may have access to a broader range of investment opportunities, including private placements, while non-accredited investors may face certain restrictions to safeguard them from potentially riskier investments. Now this may all be changing.
The House of Representatives passed a bill in May of 2023 that lays the groundwork for the development of an SEC-accredited investor exam. This initiative is designed to strengthen investor protection, broaden investment opportunities for non-accredited investors, and ensure that individuals possess the requisite knowledge and qualifications before engaging in specific investment opportunities. The bill passed with an overwhelming 383-13 bipartisan vote. Due to the bipartisan support of this bill, it looks like it will also be passed in the Senate. Once it’s official, any individual who can pass an exam showing they know enough about the risks they are taking with private placement investments will be defined as accredited, and legally be able to access 506(c) investments.
This development is excellent for General Partners (GPs) as it expands the pool of potential investors. Over the past year, I’ve conversed with numerous individuals eager to invest but unable to participate in a 506(c) offering because they hadn’t met the criteria. These often include young professionals with substantial salaries, although just below the $200,000 threshold and falling short of the $1,000,000 net worth requirement.
As we’ve gone over in the past, the sooner you start investing and compounding the better. We believe compound interest is the 8th wonder of the world and wrote two separate blog posts on the topic, The Power of Compound Interest and The Power of Compound Interest Part II. With more investments available to well-qualified young professionals there will be more opportunities to begin accumulating wealth at an earlier age.
Major Market News
House Approves Equal Opportunity Act with SEC Test
According to an article by Investment News, the House has overwhelmingly approved the Equal Opportunity for All Investors Act, securing a strong bipartisan majority of 383-18. This legislation introduces a significant shift in the definition of accredited investors by proposing an SEC test. Investors who do not meet the current net worth threshold would be able to become certified as accredited investors, by passing an examination designed by the SEC and administered by the Financial Industry Regulatory Authority Inc. The primary objective is to expand the pool of accredited investors beyond the conventional income and net worth criteria, enabling broader participation in private placements, including those from start-ups and real estate ventures. While proponents view this as an opportunity for portfolio diversification and increased returns, concerns about the risks associated with private markets led to the incorporation of an SEC test. The bill now heads to the Senate, with its legislative prospects yet to be determined.
Source: Investment News. (2023, June 1st) House vote advances bill to set SEC test to become an accredited investor.
Tips and Tricks
Compound Interest: Compound interest means earning interest not just on your initial amount of money but also on the interest it has already earned. It leads to your savings growing at an accelerating rate over time.