August 3, 2010
This new accreditation significantly hurts investors who have prudently paid off their mortgages and own their homes outright. Someone who rents and has $1,000,001 in declared net worth is accredited and can legally consider all types of private place opportunities. An investor who has prudently paid off the value of a home which could be of net worth of $975,000 and has $750,000 of additional assets for a total net worth of $1,725,000 is not accredited and cannot consider any type of investment that is not publically registered which requires hundreds of thousands of dollars, that the investors pay.
The first issue is how does this affect investors who are in the middle of a 1031 exchange and have already identified a property being offered as a private placement for their exchange, who now does not qualify as an accredited investor because they cannot count their residence. This investor could now be facing tens of thousands if not hundreds of thousands of tax dollars. Does this law not hurt the investor it was trying to help?
Next, is that if a resident who is retired and had the prudence to pay off his or her residence and that home is worth a significant amount of over $1million and the rest of his or her portfolio is valued at $800,000 this person is not accredited. However, if this person were to take a loan against the residence and pull $200,000 of equity out this person is now accredited. What if the persons home is worth $2.5 million and after a large stock market crash this persons other assets total $750,000? This person cannot make a $25,000 investment in a private placement even though the private placement maybe an all cash conservative investment, that produces long-term tax sheltered income, unless he or she now leverages the house to add value to the net worth outside of the home. .
There must be some change given for real estate and other potentially conservative investments that use the private placements to offer opportunity to investors as alternatives to the equities, bonds and traditional investments. These investment opportunities are primarily obsolete to an average investor because the costs of doing a public offering are way too high and would ruin the returns of very investors it is supposed to help.