Accredited investor requirements in the private marketplace limit private investment opportunities to only the wealthiest individuals. These requirements were put in place to protect unsophisticated investors. However, many believe the Securities and Exchange Commission’s (SEC) investor accreditation requirements are in need of reform.
What Constitutes an Accredited Investor?
An accredited investor is an individual or entity that is permitted to invest in securities not registered with financial regulators. As an individual, to qualify as an accredited investor, you must meet these requirements in addition to others:
A natural person with income exceeding $200,000 USD in each of the two most recent years or joint income with a spouse exceeding $300,000 USD for those years and a reasonable expectation of the same income level in the current year.
OR;
Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000 USD. The person’s primary residence shall not be included as an asset.
These requirements effectively exclude the vast majority of U.S. households from participating in private stock ownership.
What is the Purpose of the Accredited Investor Requirements?
Financial regulators have established requirements for accredited investors in major part to protect potential investors who may not have familiarity with these types of investments and if they participated would place themselves at significant financial risk.
With the establishment of these standards, regulators ensure that only knowledgeable investors in the realm of high-risk investments and with sufficient financial stability to absorb the loss of those investments can operate as accredited investors. In short, these rules are in place to protect the vast majority of investors who do not have the financial resources to absorb a failed investment opportunity as opposed to the issuers of the unregulated securities.
Rather than allowing every potential investor to trade in risky securities, the requirements for accredited investors establish limitations. Reserving these opportunities to the relatively few financially capable investors.
Capital markets are continuing to change. However, the accredited investor requirements have not changed at the same cadence as market conditions. According to some, the time may have come to modify these requirements so access to these opportunities can be opened up to more investors.
