Updated: Jun 21
This is a topic that may not be on the forefront of our minds but is nevertheless an important issue that affects our economy and our society: accredited investors.
The Origins of the accredited investor status...
The Securities Act of 1933.
In the years leading up to the Great Depression, unscrupulous practices by some members of the financial industry had left many ordinary Americans destitute. The widespread sale of securities that were essentially worthless had led to a complete loss of confidence in the stock market, and many families had been left with nothing.
In this context, Congress passed the Securities Act of 1933, which sought to restore trust and confidence in the financial markets by requiring companies to fully disclose all relevant information about their securities before they could be sold to the public.
This groundbreaking legislation was a watershed moment in the history of our financial markets. For the first time, companies were required to provide full and fair disclosure of all material information about their securities, including the risks associated with investing in them. This allowed ordinary Americans to make informed investment decisions, and it helped to prevent the types of abuses that had caused so much harm in the past.
What is an accredited investor ?
Accredited investors are individuals or entities that meet certain financial requirements set by the Securities and Exchange Commission (SEC) in order to participate in certain types of investments that are not available to the general public.
These investments include real estate, private equity, venture capital, hedge funds, and other similar offerings that are typically not available on public markets.
The idea behind accredited investors is that these individuals or entities have the financial means and expertise to understand the risks and complexities of these types of investments, and are therefore better equipped to make informed decisions about whether to invest in them. However, the concept of accredited investors has been the subject of much debate and controversy in recent years.
On one hand, proponents of the current system argue that accredited investors are necessary to ensure that these types of investments are only accessible to those who can afford the risks and who have the knowledge to make informed decisions. They also argue that loosening the requirements for accredited investor status could lead to increased fraud and abuse in the investment industry. That being said, I think we are all well aware of the fact that some of the biggest investment frauds in history have been committed recently and those victims were accredited.
On the other hand, critics of the current system argue that the requirements for accredited investor status are too strict and exclude many individuals who could benefit from these types of investments. The current system perpetuates wealth inequality by limiting access to these opportunities to a select few.
As someone who has always been committed to promoting economic opportunity and fairness, I believe that we need to take a closer look at the current system of accredited investors and consider whether it is truly serving the interests of all Americans.
First and foremost, we need to consider whether the requirements for accredited investor status are too strict and exclude too many individuals. Currently, to qualify as an accredited investor,
an individual must have a net worth of at least $1 million, excluding their primary residence, or have earned at least $200,000 in each of the past two years (or $300,000 for joint filers) or hold in good standing a Series 7, 65 or 82 license.
These requirements effectively exclude all but the wealthiest Americans from participating in these types of investments.
In fact, according to a report by the Government Accountability Office, only about 9% of households in the United States meet the net worth requirement for accredited investor status, and only about 6% meet the income requirement. This means that the vast majority of Americans are effectively shut out from these opportunities, regardless of their level of financial literacy or their ability to assess risk.
This is a problem because these types of investments can offer significant returns and can be an important way for individuals to build wealth over time. By limiting access to these opportunities, we are effectively perpetuating wealth inequality and making it more difficult for everyday Americans to achieve financial security and stability.
Furthermore, the current system of accredited investors may actually be contributing to fraud and abuse in the investment industry. By limiting access to these opportunities to a select few, we are effectively creating a two-tiered system of investing, in which those who are not accredited investors are left to invest in publicly traded securities that may not offer the same level of returns.
This creates an incentive for unscrupulous individuals and organizations to offer fraudulent or misleading investment opportunities to those who are not accredited investors. These individuals may be less sophisticated and less able to assess the risks of these investments, making them more vulnerable to fraud.
We need to take a more proactive approach to combating investment fraud and abuse, and that means considering whether the current system of accredited investors is truly serving our interests as a society.