By: Vanessa Schoenthaler and Jonathan Friedland
One in a series of articles explaining why and how Accredited Investors will likely change their investment strategies because of the JOBS Act of 2012
Installment #1- Are you an Accredited Investors and, if so, what does that mean? Let us introduce you to Bob.
Bob lives in Middle America, where he owns a nice house in a middle class neighborhood and drives a practical car which he bought used several years ago.
Bob isn’t fancy, however. In fact, if you asked him, Bob would tell you that he was just an ordinary guy
Meet Michele. Michele lives in a large coastal city. She owns a nice, but not over-the-top condo in a residential neighborhood and walks or relies on public transportation to get to work. Michele isn’t fancy either; she’s just an ordinary urbanite.
Finally, meet David and Isabella. They live, with their two school-age children, just outside of a mid-sized city. They also own a nice house in a nice suburban neighborhood and each drives a nice, but not new car.
But like Bob and Michelle, David and Isabella aren’t fancy and if you asked them they would also tell you that they’re just an ordinary family.
Aside from being ordinary, there is one other thing that Bob, Michelle and David and Isabella all have in common: they’re allaccredited investors.
Who is an accredited investor?A down and dirty definition of an accredited investor is someone whose net worth, either alone with a spouse, exceeds $1 million (not including the equity in her or his primary residence) or someone who has earned more than $200,000 (or $300,000 with a spouse) for the past two years and reasonably expects to earn more than $200,000 (or $300,000 with a spouse) in the current year.
What’s the significance of being an accredited investor? In a nutshell, accredited investors are able to participate in certainalternative investment opportunities that are not otherwise available to non-accredited investors. Think: private equity, venture capital and angel investments, hedge funds, private shares, and private placements.
Being an accredited investor without investing like oneGetting back to our accredited investors…
Bob is self-employed. He owns a factory that employs about 50 people. It’s located in the same town that he lives and grew up in. Bob’s net worth is about $35 million, making him an accredited investor under the net worth standard.
Michele is a doctor. She works in busy emergency room located on the opposite coast from where she grew up and went to medical school. With several years of experience under her belt, Michele’s salary is comfortably in excess of $200,000 a year, making her an accredited investor under the individual income standard.
David is a Senior IT Specialist at a Fortune 500 company and his wife, Isabella, is a Marketing Director at a midsized private company. They met in college, married, and not too long thereafter started a family. Over the last several years, their combined salaries and year-end bonuses have exceeded $300,000 a year, making them accredited investors under the joint income standard.
Each of Bob, Michele and David and Isabella are accredited investors, yet none of them has ever participated in an alternative investment opportunity requiring that they be an accredited investor. Most of their investment funds are held in IRAs, 401ks or 403bs, in publicly traded mutual funds, individual stocks, and bonds, and, in Bob’s case, in his own business and some local real estate.
So why haven’t any of these accredited investors participated in an alternative investment opportunity?
Let’s take a closer look at Bob. Bob doesn’t live in Greenwich, Connecticut, Silicon Valley, or any of the other affluent suburbs of major metropolitan cities where he’s likely to have investment bankers, tech entrepreneurs, or fund managers as friends and neighbors. Nor does Bob have a finance degree or an MBA. He is completely uninitiated when it comes to the world of alternative investment opportunities and accredited investing.
What’s more, the federal securities laws prohibit—at least for a little while longer—accredited investment opportunities from coming to Bob unless they come through someone that Bob already has a relationship with. In other words, the law prohibits anyone from conducting a “general solicitation” or any sort of public advertising to attract accredited investors. As a result, without knowing the right kind of people, Bob has historically been out of luck in terms of being exposed to alternative investment opportunities.
All that’s about to change however, as a result of a new law enacted in April, 2012, the Jumpstart Our Business Startups Act (or “JOBS Act” for short). Under the JOBS Act, entrepreneurs, companies,private equity and venture capital funds, hedge funds and others will all be able to advertise investment opportunities and solicit investments from accredited investors, including Bob, Michele, and David and Isabella.
While there are many important features of the JOBS Act, its lifting of the prohibition on general solicitation and adverting is the key-most feature for people like Bob, Michele, and David and Isabella.
Accredited investors will be bombarded with sales callsOnce the necessary JOBS Act regulations are in place, accredited investors like Bob, Michele and David and Isabella are going to be bombarded by broker-dealers and other investment intermediaries, private equity and venture capital funds, entrepreneurs, and others, all seeking to persuade them to allocate a portion of their investment portfolio to alternative investment opportunities.
Accredited investors who are not experienced in making such investments will suffer some degree of information overload as they get up to speed on these investment categories. There will also be scams and schemes designed to take advantage of their lack of knowledge. At the same time, however, the opportunity to diversify into these alternative investments offers accredited investors the potential for greater overall investment returns and smart diversification.
Changes in the law as a result of the JOBS Act will be well covered by the media because an overwhelming majority of the upward of 10 million accredited investors (estimates vary) in the U.S. have never made an investment that requires them to be one. Why? Because they are like Bob, Michelle, David, a Isabella.
If you are in the same boat, you will want to understand this area—even if only to decide it is not for you.
Why this Series?Our purpose is to introduce you to the private markets for alternative investment opportunities that are available to accredited investments, to educate you about how they operate, and to inform you of the many changes that are about to take place.
We are not here to try to introduce you to the next big investment opportunity or to try to convince you that alternative investments are the right kind investments for you. Our basic mission is to provide you with objective and reliable information that you can use to decide for yourself.
NEXT INSTALLMENT: What Kind of Alternative Investment Opportunities Are Available to Accredited Investors?
About the Authors:
Friedland is founder and chairman, and Schoenthaler is general counsel, of DailyDAC, LLC, which owns and operates AIMkts. Friedland practices corporate law in Chicago at the Levenfeld Pearlstein law firm; Schoenthaler maintains a private practice in New York City, where she focuses on securities law.
This article is copyright©2013 by DailyDAC, LLC.