The financial history of the world is littered with examples of investors not performing due diligence and investing more than they could afford to lose. Readers of our newsletter might recall the Tulip Mania of the 1600s, or the speculations on government debt in the 1700s, or even the stock market crash of 1929. Finally, in 1933, as a part of the New Deal, the Securities and Exchange Commision (SEC) was born as a way to protect investors and maintain the relative stability of the stock market.
Fast forward to 1978, and the first mention of the term “accredited investor” makes it into law under the adopted rule 242. Essentially, the SEC defines “accredited persons” as large institutions or wealthy individuals who do not need the protection of securities laws because they themselves have the bargaining power and sophistication to underwrite the level of risk required for real estate investing.
In 1982, the requirements for accreditation that we are all familiar with were adopted. These requirements being a net worth of $1,000,000 or a $200,000 annual income. Largely, these requirements have stayed the same since 1982 even though they provide less protection than they did in the 80s. For example, in 1983, just 1.8% of households qualified as accredited investors, whereas today that number is almost 14%.
The last change to these requirements came as a result of the 2008 financial crisis when the Dodd-Frank act excluded primary residence from the net worth calculation. In addition to the $1,000,000 net worth mark being more difficult to achieve, the Dodd-Frank act added a clause for couples filing jointly making $300,000 or more to qualify as accredited.
These regulations certainly can be a high bar to clear, but they also protect retail investors from the kinds of historical financial mistakes that you can read about in our newsletters. Keeping the train on the tracks is the goal of the SEC, and we agree with, and follow, their guidelines.
