How much money do you have? How much money do you make? Why is it my business to know any of that stuff? That’s what someone asked us the other day when he was ready to invest into one of our funds.
We wish it didn’t have to be our “business,” but the U.S. Securities and Exchange Commission (SEC) says it does. After the Jobs Act in 2011, criteria changed dramatically for those of us who run private placement-type funds. The doors opened up wide in the investment world, but with a caveat: more regulation.
Now, I can’t believe I’m going to say the following, but it is true. This was a huge deal in helping our industry come out of the dark ages. It made non-traditional investments finally available to a broader group of people. It was the one thing done under the Obama administration, in my opinion, that was positive for small businesses and businesses in general. It allowed us to grow at a much faster pace.
Before the Jobs Act, we could only advertise our funds to those people/investors with whom we had some type of “pre-existing relationship.” It is hard to grow your business within a finite circle of friends and family. There has always been a way around that for us, which is simply to advertise and market individual homes for sale outside of the fund. That was, and still is, perfectly within the rules.
Sometimes that would lead to a potential investor building a relationship with us, and we were then able to have them invest into our fund.
The Jobs Act allowed us to market our funds to the world. It essentially said: Now you can advertise to anyone you want, but we are going to add a new regulation to that freedom. Everyone who invests in your funds must be accredited. Bam! The door opened for Hughes Capital to reach so many more interested investors. It also allowed thousands of businesses to finally raise money in places like Kickstarter and other crowdfunding platforms.
Now, let’s define an “accredited investor” in the simplest way possible. You have to have a net worth of $1M (not including your primary residence) OR make $200K in income as an individual OR $300K in joint income for the past two years and you must expect to make the same (or more) in the current year.
We do that same thing today with our turn-key homes in the Midwest. Some of these homes are rentals and some are homes we are carrying the 1st mortgage on. While you must be accredited to invest in the Guardian Fund, nothing stops a non-accredited investor from purchasing some of those individual homes or notes.
There was one more regulation added. An investor often needs to become certified as “accredited” by a third party such as their accountant, financial advisor, or attorney. The exception to that rule is if there is reasonable, intimate knowledge on our part that they fall under that criteria. We will sometimes just collect information from them, such as bank or brokerage statements that prove a $1M net worth, for our files.
This goes back to the question our potential investor asked: what business was it of ours to know how much money he has or makes? It is only our business because it has to be. We have to collect that information in the investor’s file in case we are ever audited by the Secretary of State’s office or the SEC.
Yet like so many regulations, these are arbitrary. Just because a person has a $1M net worth doesn’t mean they can or should invest and, more importantly, that they are qualified enough to make those decisions. We all know there is no way to blanket protect everyone. I would even argue that many non-traditional investments, including ours, are much safer than the traditional investments that are part of the Wall Street machine.
Right now, if you are not accredited, nothing stops you from investing all of your money in one stock. The only reason that is allowed is because it’s considered a traditional investment. That is crazy. That one stock could go to zero and all would be lost.
Compare that stock to a home in the Midwest that sells for $37K, collects a monthly rent of $560, doesn’t fluctuate much in price or value, and returns an 11% net cash flow every year that includes a warranty from us. The house can’t, and won’t, go to zero. Maybe it would become harder to rent, so the rent would have to be lowered to attract a tenant. If rent went down to $448, could you live with a net cash flow of 7% to 8% instead? All day long you could — and that is a whopping 20% drop in rent. You could even drop the rent by 40% and still have a 4% net cash flow!
All laws are meant to keep the honest people honest. The crooks couldn’t care less. If they are going to rip someone off, they are not worried about collecting the proper information for their files. They just want your money. So yes, we need to know a little bit about you for our files, but that is a small price to pay to be part of a non-correlated investment that brings diversity and safety to your investment portfolio.