Many complicated and unregistered securities products, such as private-placement real estate investment trusts (also referred to as “private-REITs”), can only be sold to “accredited investors,” a term defined by the Securities and Exchange Commission.
This requirement aims to protect unsophisticated and/or lower-net-worth investors from marketing materials and sales pitches designed to promote exceptionally complicated and/or risky products. By limiting the marketing of certain products to only “accredited investors,” the rule also permits certain of those products to be sold without registration and without specified disclosures.
Under SEC rules, an individual can qualify as an “accredited investor” if the individual has a net worth of at least $1 million. Until recently, principal places of residence were considered a factor in the net worth calculation. Now, in order to meet the requirements of the Dodd-Frank Act, the SEC has amended the rule to exclude the value of an investor’s home from the calculation.
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This change means fewer individuals will qualify as “accredited investors,” which will limit the marketing pool for certain investment products. Hopefully, the amended rule also will limit the number of unsuitable pitches made to investors who cannot afford to lose their nest eggs.
This change will take effect 60 days from publication in the Federal Register. For more information about the new rule, read the SEC’s full release here.
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