What is the SEC Accredited Investor Exam?

Current Accreditation Requirements

There is currently no formal process for becoming an accredited investor, you simply must meet the following requirements:

1. To be an individual accredited investor you must either:
   – Have an income exceeding $200,000 for the past two years with the same expectation for the next year, OR
   – Have a net worth exceeding $1 million, excluding the value of your primary residence.
2. To be a joint accredited investor with your spouse you must either:
   – Have a joint income of $300,000 for the past two years with the same expectation for the next year, OR
   – Have a joint net worth exceeding $1 million, excluding the value of your primary residence.
3. To be an accredited investor as a Trust you must:
   – Have total assets in excess of $5 million
   – Not have created the trust with the purpose of specific alternative investments
   – Be directed by a person with financial and business understanding to evaluate merit and risk
4. To be an accredited investor as an entity:
   – Each individual in the ownership must be an accredited investor

A New Option to Qualify

As of May 2023, the House voted to pass legislation, administering the SEC to introduce an exam program that would qualify investors as accredited. The accredited investor exam would require potential investors to demonstrate a certain level of financial sophistication and understanding of investment concepts. The exam is intended to gauge an individual’s ability to assess risks and make informed investment decisions. If the bill progresses through the legislative process and becomes law, the exam itself would be administered by the Financial Industry Regulatory Authority (FINRA).

Impact on Commercial Real Estate Investors

• The accredited investor exam would contribute to enhanced investor protection by ensuring that individuals have a basic understanding of investment principles. This knowledge can serve as a safeguard against potential fraudulent schemes and predatory practices. By promoting financial literacy, the exam aims to empower investors to make more informed decisions about private offerings they’re interested in.
• The exam may also help level the playing field for investors by democratizing access to private investments. Currently, eligibility to invest in certain offerings, including those related to commercial real estate, is based on income or net worth thresholds. However, passing the accredited investor exam could provide an alternative path to qualifying as an accredited investor, irrespective of income or net worth. This could allow a wider range of individuals with the necessary knowledge to participate in the private investment landscape.
• The exam’s focus on financial understanding and investment concepts will encourage aspiring investors to broaden their knowledge and expertise in the field. Thus, this could lead to a more sophisticated investor base, fostering better decision-making and potentially mitigating risks.

What’s Next?

The passage of the bill to establish an SEC accredited investor exam signifies a significant step towards strengthening investor protection and opening the door for new investors, even if they don’t meet the wealth-based requirements. For commercial real estate investors, this development has the potential to reshape the sector by expanding access to investment opportunities and fostering a more informed investor base. While the bill’s impact on the industry remains to be seen, it is clear that this regulatory measure is aimed at creating a more transparent and equitable investment environment. As the bill progresses through the legislative process, market participants should closely monitor its implications and adapt their strategies to align with the evolving regulatory landscape.