The Accredited Investor Definition Should be Modernized to be more Inclusive

However, it’s tricky

As of today, for someone to be considered an accredited investor, their net worth (alone or with a spouse) must exceed $1 million, or hit a six figure income target. Banks, corporations and institutions may also become accredited investors. These guidelines were created, along with the SEC itself, as a direct result of the market crash of 1929, which triggered the Great Depression. The intentions behind these regulations were reputable: to protect inexperienced investors. Currently, the SEC is the only entity entitled to modify the qualifications for accredited and non-accredited investors. As of the summer of 2019, the Commission is currently looking at softening the standards for accredited investors. The finance community has been vocal and engaged with this opportunity for modernization – it’s exciting to witness.  

Once upon a time

In the early 20th century, the financial rules governing who could make investments were modest and appropriate, given the times. However, US census data shows that even as recently as 2015, accredited investors are in the 95th percentile. There’s no doubt that the current system of rules is outdated – it bypasses the majority of the population. As such, most Americans are missing out on potentially lucrative investment opportunities, while a privileged few are making out like bandits.

The great equalizer 

Unfortunately the original creators of the SEC lacked the benefit of hindsight, unlike today. We’ve had the opportunity to watch investment disasters like the Frye Festival, WeWork and Theranos (to name a few) unfold in real-time. Those high profile failures seem to prove that the wealth test isn’t an accurate reflection of one’s level of investment knowledge. It’s clear, however, that both rich and poor people may equally fall victim to fraud, and professional investors aren’t necessarily more savvy than ‘ordinary people’. With plenty of examples like this, now seems like the perfect time for the SEC to revisit the regulations surrounding accredited and unaccredited investors.

A dose of hypocrisy

While it may be the government’s responsibility to protect the financial interests of its citizens through appropriate oversight, they account for several instances of fiscal hypocrisy. For example, in American culture, playing the lottery is a socially acceptable activity, even though 5% of players account for 54% of lotto sales. The government is acutely aware of the predatory nature of ‘A Dollar and A Dream’, but they seemingly target their marketing to the most vulnerable citizens – turns out the lottery has a very American history. 

What’s more is, the past several decades have witnessed the skyrocketing of student loan debt; a crippling albatross for many. One would think that a government hellbent on encouraging student loans and lottery ticket sales would be best served by listening to feedback from the financial community regarding the most inclusive routes forward. Only of course, if there is any real intention to make a change.

A happy medium

It is possible to protect investors while simultaneously bringing financial opportunities to educated and intelligent people, regardless of income level. Thanks to the JOBS Act, times have changed and crowdfunding portals supporting either Reg. CF (equity crowdfunding (Title III)) or Reg. A+ (Title IV), have become a practical option for ordinary people to enter the world of investing – accredited or not! In the words of TruCrowd Inc.’s Vincent Petrescu, “If you have less money, you are allowed to invest less, but you can still play your hand.” Together, the financial community should aspire to move towards the same goal: increasing opportunity for everyone.

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