In the past decade we’ve seen a new financial movement take shape: a focus on giving more investors a seat at the table. More and more people and organizations are realizing that investors of all income levels and backgrounds could (and should) have the opportunity to access more asset classes. In this technology-enabled age of access, data and transparency in investing, there is an opportunity to update our laws to ensure that smaller investors are not excluded from the opportunity to create wealth — opportunities that have emerged under the financial ethos of fintech: crowdfunding, peer-to-peer, financial literacy and inclusion.
In the same way that the financial industry has drastically expanded and even improved in the last decade, so too should some of its more exclusive laws — specifically, the accredited investor restriction. This prohibits non-accredited (i.e., not already wealthy) investors from investing in a range of innovative financial products, many of which are actually designed to reduce the expensive costs of financial intermediaries and give investors better options.
Chairman Jay Clayton has asked the SEC to weigh how to responsibly open new investment options so that all Americans can be included, and public comment was recently opened. Along with our fellow members of the Marketplace Lending Association, we applaud the SEC for looking at the issue and urge a comprehensive review.
At our company, the goal is to make the unique asset of real estate debt available to everyone through our two-sided marketplace in which investors can access a diversified group of secured real estate loans, funded by private lenders and backed by data analytics, due diligence and internal underwriting processes.
Our motto spells it out plainly: We want to level the playing field between Wall Street and Main Street.
Unfortunately, our goal of bringing democracy to real estate investing is, so far, only partially realized. Government regulations today are not inclusive for small individual investors. The accredited investor definition effectively categorizes the vast majority of American citizens as less than equal, shut out from many investment opportunities, including platforms like ours.
Under the current definition of an accredited investor, only those who meet high wealth or income standards (e.g., a combined household income of $ 300,000) can be offered even close to a full range of modern investment opportunities.
While smaller investors’ inability to access a handful of important investment opportunities has received some news coverage — such as with the private equity rounds of some notable giants — there are applications in other asset classes that may be lower risk than investing in shares of such well-known “unicorn” companies.
These accredited investor restrictions were initially created to protect the unknowing investor from participating in investments they might not understand. It’s the right intention, considering certain investment products can be extremely complex and potentially come with such elevated risk that only high-income earners could tolerate a loss.
But this doesn’t exactly solve the risk problem. By being able to easily access data and information that in previous decades was generally only accessible to the most sophisticated (and wealthy) investors, today’s average investor is excluded from many more products that are made easy to understand and to invest in through technology, with a similar (if not greater) level of safety as opportunities non-accredited individuals can invest in. My argument is still this: Wealth does not equal investor sophistication, and wealth should certainly not equal more opportunity. Today’s laws do not appropriately address either issue.
It’s clear that, despite its good intentions, this exclusionary policy is ripe for reform. The resulting regulations contribute to further widening the gap between the wealthy and the middle class, as well as create illogical distortions between investment products. Those same investors who can’t invest in private real estate deals face no such limitations in buying cryptocurrencies, which have fluctuated wildly in price (or have even been outright fraudulent).
With the number of publicly listed companies shrinking, there is an ever-growing need for alternative products that allow Main Street investors to diversify their investments, stabilize their portfolios and earn better risk-adjusted returns. By taking a more balanced and rational approach, we can help small investors gain access to more alternative investment opportunities.