SEC regulations are put in place to help protect both investors and investment companies, and new regulations from within the last several years have had an impact on fintech platforms specializing in multifamily real estate investing. Investors should be aware of these regulations and the effect they can have on investment choices.
Regulation Crowdfunding
Crowdfunding is used by some fintech real estate investment groups/companies to raise capital for the purchase of properties. This option makes it easier for everyday investors to add real estate to their portfolios without taking on the risk of a real estate purchase alone. With the increase in popularity for this type of investment, the SEC has set out some specific guidelines. These regulations cover a broad range of issues related to crowdfunding for investment, including limits on contributions from non-accredited investors to rules for disclosure statements. Under regulation crowdfunding guidelines, companies are able to raise up to $5 million through its crowdfunding offerings over a 12-month period, with investments being open to both accredited and non-accredited investors.
Protections put in place for non-accredited investors may prevent them from putting too much money into a single investment. They also restrict the resale of securities by non-accredited investors for a period of up to 1 year, which can help those new to the real estate market begin building a long-term growth strategy.
Rule 506(C)
While fintech is a catalyst to help new investors break into real estate investing and other non-traditional investment platforms, it also provides added benefits for accredited investors. Fintech companies specializing in single-asset real estate offerings for accredited investors can take advantage of Rule 506(C), which is an SEC regulation that deals with solicitation. Simply put, fintech companies can leverage digital marketing strategies to advertise their offerings to qualified investors. In order to satisfy the Rule 506(C) requirements, fintech companies must ensure all purchases made in an offering are performed by accredited investors and that reasonable steps are taken to confirm their accredited status. Certain other regulation D requirements must also be fulfilled.
So how does rule 506(C) benefit investors? It gives them a chance to discover new investment opportunities so they can have more freedom to choose the options that work best for them. For example, a fintech multifamily real estate company may have several properties available for accredited investors, but advertising each one gives individuals the chance to determine which asset they want to invest in. This level of freedom in investing is what makes the fintech industry so promising for those looking to build on their existing wealth.
Accredited Investor Definition Updates
The regulations for achieving accredited investor status were put in place to help ensure individuals taking on investments with bigger risks had the experience and sophistication, as well as the money, to handle those financial decisions. However, some of the restrictions regarding accredited investor status ignored some key exceptions. The SEC recently undertook some actions to include individuals who could not take advantage of accredited investment offerings. Here’s a look at some of the most recent changes:
- Professional certifications, credentials, or designations: allows individuals not meeting personal income/wealth requirements to become accredited investors.
- Knowledgeable employees: Employees working within a private fund with a certain level of knowledge about it may be qualified as investors.
- Spousal equivalent: Married couples can pool their assets to meet income thresholds for achieving accredited investor status.
- Qualified entities: Limited liability companies with $5 million in assets may also become accredited investors upon meeting certain qualifications.
There are a number of other additions to the update, including rules regarding family offices and clients and a new category for governing bodies. While each category has its own regulations and stipulations, the end result is making accredited investor status more achievable for those who have the level of sophistication needed to make informed investments. Fintech companies with regulation D real estate offerings (those open only to accredited investors) are more accessible than ever before, providing more ways to diversify and build long-term wealth.
While SEC regulations may seem complex and cumbersome, they don’t need to have a negative connotation. Many of the updates and changes seen recently provide great benefits for both fintech companies and individual investors. Whether you’re an experienced accredited investor or a newer non-accredited investor looking to begin your wealth-building journey, changes in regulations impacting the fintech industry can be great news. To learn more about DiversyFund’s offerings for accredited and non-accredited investors, click here.
