The rules that govern who can invest in private offerings may be changing.
Right now, policymakers in Washington are debating several proposals that could reshape how investors participate in alternative investments—including real estate syndications. These conversations involve Congress, the SEC, and industry professionals, and while nothing has been finalized, the direction of the discussion matters for both investors and sponsors.
In a recent episode of Ritter on Real Estate, I spoke with securities attorney Gene Trowbridge about what’s happening behind the scenes and how these potential changes could impact the future of passive investing. Here’s what you need to know.
The Ongoing Balancing Act: Capital Formation vs. Investor Protection
At the heart of these discussions is a long-standing tension within securities regulation. On one side is capital formation—making it easier for businesses to raise money from investors. On the other side is investor protection—ensuring people don’t take risks they don’t fully understand.
Private investments like real estate syndications typically operate under Regulation D, which was introduced in 1980. This regulation created the concept of the accredited investor, a classification meant to identify individuals who are financially sophisticated enough to participate in private investment offerings without the same protections required in public markets.
At the time Regulation D was created, the thresholds were set at:
– $1 million net worth (excluding a primary residence today)
– $200,000 annual income individually or $300,000 jointly
In 1980, only about 3% of US households qualified as accredited investors. Today, that number has grown dramatically. Estimates suggest 18–20% of households now qualify, largely due to decades of asset appreciation and rising incomes. For regulators concerned with investor protection, that growth has sparked new questions.
Proposal #1: Removing Retirement Accounts from Net Worth Calculations
One proposal being discussed is removing retirement savings from the accredited investor net worth calculation. Currently, someone can include funds in IRAs. self-directed retirement accounts and/or other retirement savings when determining whether they meet the $1 million net worth requirement. If regulators remove retirement accounts from the calculation, the number of accredited households would likely drop significantly—from roughly 18% down to around 12%.
The reasoning is straightforward: policymakers worry that individuals who rely on retirement savings shouldn’t be exposed to high-risk private investments if those funds represent their financial safety net. While this change wouldn’t prevent people from investing entirely, it would reduce the number of individuals eligible to participate in certain private offerings.
Proposal #2: Allowing 401(k) Money to Invest in Alternatives
At the same time, Congress is exploring a very different idea: allowing 401(k) funds to be invested in alternative investments like private real estate deals. Today, investors can typically use self-directed IRAs for alternative investments, but 401(k) plans usually limit participants to traditional options like mutual funds or index funds.
Opening the door for 401(k) capital could unlock a massive new pool of investment dollars. However, the challenge lies with employer liability. Because employers sponsor 401(k) plans, they may face legal risk if employees are allowed to invest in riskier private opportunities that later lose money. As a result, many companies would be reluctant to offer those options without clear regulatory protections.
If this change were implemented, it could significantly expand access to alternative investments—but it would also require careful rule making.
Proposal #3: A Test to Qualify as an Accredited Investor
Another proposal currently being discussed would allow individuals to become accredited investors by passing a knowledge-based exam, regardless of their income or net worth. The idea is simple: if someone demonstrates financial sophistication, they should be allowed to invest.
However, implementing this concept raises practical challenges. Regulators would need to answer questions such as:
– What topics should the exam cover?
– How do you measure investment sophistication across different asset classes?
– Who administers and grades the test?
Real estate investing, venture capital, private equity, and oil and gas deals all involve different risks and structures. Designing a universal test that proves an investor understands them all is not easy. While the concept has support in theory, no agency is eager to take on the responsibility of creating and administering the test. This is the natural concern.
Two safeguards matter:
1. Collateral Coverage: The note is typically acquired below current market value, creating embedded equity.
2. Professional Servicing: For approximately $25–30 per month, a licensed loan servicer:
– Collects payments
– Monitors taxes and insurance
– Handles regulatory compliance
– Manages default procedures if necessary
– Reports to the IRS
This removes most operational burden from the investor. Compare that to owning single-family rentals, where unexpected repairs, tenant turnover, and ongoing management require consistent attention. The difference is structural: the lender oversees; the landlord operates.
Proposal #4: Legalizing “Finders” Who Introduce Investors
Another regulatory issue receiving attention is the role of finders. A finder is someone who introduces investors to a deal sponsor. Today, US securities law generally prohibits paying someone transaction-based compensation for raising capital unless they are a licensed broker-dealer. There has been discussion about creating a framework that allows people to legally introduce investors without requiring a full broker-dealer license.
One concept under consideration would allow individuals to make introductions but not provide investment recommendations or receive transaction-based compensation. The goal would be to encourage capital formation while maintaining investor protections. However, regulators still have major questions to answer, such as:
– Should finders be licensed
– Should they be required to disclose track records?
– What due diligence responsibilities should they have?
For now, the rules remain strict, but this conversation continues to evolve.
What This Means for Passive Real Estate Investors
At this stage, none of these proposals have been finalized. But the direction of the conversation is clear. Policymakers are actively evaluating how private investment markets function and how investors participate in them.
Some potential outcomes could:
– Restrict who qualifies as an accredited investor
– Expand access to retirement capital
– Create new ways to demonstrate financial sophistication
While the exact changes remain uncertain, the regulatory landscape for private investing is likely to evolve in the coming years.
Four Questions Every Passive Investor Should Ask
Regardless of how regulations change, Gene Trowbridge shared four questions every passive investor should ask before investing in any syndication.
1. Is There a Continuity Plan?
If the deal sponsor becomes unable to operate the investment, is there a structure or team in place to continue managing the project?
2. Does the Sponsor Have a Track Record?
Every sponsor starts somewhere, but investors should understand the team’s experience and past performance.
3. Does the Sponsor Have Skin in the Game?
A sponsor investing their own capital alongside investors helps align incentives.
4. What Are the Liquidity Options?
Private investments are inherently illiquid, but operating agreements should explain what happens if an investor needs to exit.
These questions often matter more than the details of the property itself.
The Bottom Line
Private investment markets have grown enormously over the past decade, and regulators are taking a closer look at how they operate. While no immediate changes have been finalized, it’s clear that policymakers are actively discussing:
– Adjustments to accredited investor rules
– Expanded access to retirement capital
– New ways for investors to qualify
– Updated regulations around investor introductions
For investors and sponsors alike, staying informed will be essential as these conversations evolve. Because regardless of the regulatory structure, the fundamentals remain the same: strong sponsors, disciplined underwriting, and thoughtful investors will always be the foundation of successful deals.