My Problem with the SEC’s Definition of an “Accredited Investor”
Accredited investors, commonly referred to as “sophisticated investors,” are investors who may legally invest in certain asset classes, such as venture capital, hedge funds, and startups, that everyday people like you and me cannot access.
In order to be recognized as an accredited investor by the SEC, you must meet the following criteria:
In other words, you need to have a lot of money or make a lot of money (and expect to keep doing so).
The SEC imposes this regulation mainly to protect people from themselves. That’s nice of the SEC (I guess), but I have three major problems with it:
- Money does not breed investment sophistication.
- It limits educated, non-accredited individuals.
- Where’s the capitalism?
Let me dig into a few quick details about each point.
Sophistication
Many experienced professionals, including lawyers and doctors, earn a decent enough living to be classified as accredited investors, and they have access to private placements as an asset class. However, do they (especially doctors) really understand the nature of these investment decisions solely because of their income?
No way.
Many of them don’t know the difference between a hedge fund and a mutual fund, yet they are free to investment in more asset classes than Average Joe, who may want to make one or two calculated, yet risky investments himself. That’s unfair.
At this point you may be thinking, “But the doctors and lawyers actually have the money to lose.” Well, not really. The SEC isn’t stopping them from putting ALL of their money into one risky investment decision that could ultimately leave them homeless.
Limiting Educated Individuals
I personally know dozens of non-accredited individuals (some of whom are quite young) who understand asset classes exclusively available to accredited investors better than most accredited individuals. They should have the same opportunity to invest their money as anyone else.
I’ll use myself as an example. I learned about angel investing and venture capital for 2+ years from incredibly smart accredited investors while managing a small VC fund. I should know a thing or two about investing in startups, right?
That doesn’t matter. Let’s assume that I earn $150,000 per year and have $350,000 in savings. I still can’t legally use my knowledge base to make a couple of angel investments in startups.
That’s just wrong.
Where’s the capitalism?
Seriously! Where’s the capitalism? I thought I lived in a country where I am free to chase “The American Dream” and do as I please with an entrepreneurial spirit. I guess not.
Allowing non-accredited investors to invest in private placements* will without a doubt result in a lot of people making bad investment decisions. However, how is this fundamentally different from short selling in public markets (where losses are theoretically unlimited, by the way) or risking one’s life savings on a blackjack table in Las Vegas? It’s not. People should be free to allocate their money as they please— it’s capitalism.
*There are rare exemptions to the rule, but I find them to be mostly worthless and avoided the topic for the sake of simplicity in this post.
