The New York Times recently discussed some regulation changes coming out of the SEC. The revisions, mandated by the Dodd-Frank Act, seek to protect investors from the dangers of high-yield, high-risk investments. The regulations are being redesigned to provide more information for potential investors–a positive outcome, it seems–but the rules will also curtail who is “accredited” (deemed competent enough to make such risky investments).
As the New York Times article points out,
…it has broader implications. Should the United States government be deciding what people can do with their money? And how do you define who is wealthy enough — and smart enough — to invest in these offerings?
Private placements, exclusive investment opportunities not offered to the general public, are a significant part of the economy–and a major reason the world of investment and finance can’t be simplified to a few numbers from the stock market. The SEC’s way of “accrediting” investors for private placements consists of measuring investors’ income and net worth. If a person makes over $200k per year, they’re deemed competent for such private, high-risk investment.
To the SEC, then, a high income is tantamount to investment savvy. Intelligence and experience don’t come into the equation–just the level of income necessary to buffer the investor from a major financial setback.
The Dodd-Frank Act alters this rule by removing an investor’s home equity from assessments of his or her net worth (a liability like one’s mortgage exceeding one’s home value is also included in this assessment).
If you ask me, determining someone’s competence by his capital is like saying a person can swim because he owns a life jacket. Sadly, regulators can’t administer IQ or Investment 101 tests to all potential investors, so net worth seems to be the most concrete measurement available–even if it measures the wrong thing.
The regulation of private investments is a major factor in the world of commercial real estate. Not all real estate transactions are conducted by massive REITs like Vornado Realty Trust (VNO), Ventas (VTR), or Simon Property Group (SPG), or by private equity giants like Blackstone (BX) or the soon-to-be-public Carlyle Group.
It seems the commercial real estate firms most likely to be impacted by this regulation are not giants like those above, but smaller, independent firms. These firms, which tend to draw large amounts of capital from a smaller number of investors, are more likely to handle local, single-property transactions. If their access to capital is curbed by these new regulations, then this measure to protect investors may actually end up hurting all but the biggest firms.