In the years following the JOBS Act became law in 2012, new investment opportunities sprang up along with new types of investors. Since that time, a continuing discussion has occurred between investment companies and the Securities and Exchange Commission (SEC) regarding investor accreditation guidelines and who qualifies for accredited investor status.
Investor Accreditation
The average investor out there can invest in any publicly traded company, regardless of income. However, investing in private firms is a different story. These investment opportunities are limited to a smaller group of individuals, with certain exceptions.
An accredited investor may be a person or a firm that the SEC identifies as qualified to take on an investment associated with privately held companies. Traditionally very wealthy individuals have been the ones to qualify for this status. The accredited investor guidelines have been implemented to protect American investors from subjecting themselves to excessive financial risks.
Criticisms of the System
For many years now, criticism has risen from various sectors regarding investor accreditation guidelines. One criticism of the guidelines has been the assumption that wealthy people are automatically more qualified than others to take on risky investment opportunities. If the intention of the guidelines is to protect investors who lack financial knowledge and savvy, all unknowledgeable investors should receive such protections, not only those of less financial means.
A second criticism is that the investor accreditation guidelines favor the wealthy. As such, investor accreditation appears to be a private club no one else can enter based on income or status in life, rather than a way to protect investors.
Yet another criticism concerns the adverse consequences of the guidelines as they relate to economic inequality and market issues. Since financial wealth does not presuppose financial savviness, an accredited investor may not necessarily be as, or more qualified, than one of lesser means.
The SEC, having absorbed these criticisms for years, eventually responded to these criticisms by expanding the definition of an accredited investor.
New Rules
The new investor accreditation guidelines make previously restricted investment opportunities available to persons of less financial means, but with sufficient knowledge to handle the risks involved. In addition, persons with particular certifications, such as Series 7, or individuals with relevant knowledge who work for an investment company, investment fund, or family office can now qualify for accredited investor status.
Issues Remain
Although the SEC changes to the investor accreditation guidelines have addressed some flaws in the system, they haven’t fixed other embedded flaws. For example, an accountant with much financial knowledge earning $125,000 USD per year cannot access the range of investments a financial novice can who has $1 million USD in liquid assets.
On the other side of the coin, the average American is not permitted to invest in high-profit, high-growth tech, and privately-held technology companies, but can trade complicated options on apps that can lose their value quickly within hours.
The updates to the SEC investor accreditation guidelines make some progress toward opening up more private investment opportunities to less wealthy investors. However, they still do not satisfy the desire of many for more changes, and in the opinion of many, they leave in place market distortions and other flaws in the system.
