April 13, 2016
To whom it may concern,
The current requirements dictating the recognition of an investor as being an accredited investor are well-intentioned though poorly defined. What was created to protect unsophisticated investors from being defrauded in private markets, has led to the consolidation of wealth in the upper socioeconomic class and created imprudent barriers to wealth generation amongst swathes of sophisticated, though technically unaccredited, individuals.
The SEC states that an accredited investor must meet substantial income or net worth requirements, which would place the individual in the socioeconomic upper class of the United States. The SEC also states that the principal purpose of the accredited investor concept is to identify persons who can bear the economic risk of investing in these unregistered securities. This implies two things: that by being particularly wealthy or generating a certain income, an individual can bear these risks, and furthermore that, because of ones wealth, an individual will be more adept at recognizing, and properly reacting to the increased risks associated with these investments.
There is significant folly in this logic. First, ability to bear losses is far more attributable to what percentage of ones wealth is invested in these particularly risky investments. An individual worth two million dollars who invests all her liquid assets into a private investment is far more exposed to hardship from losses than a middle class individual who invests 5% of his liquid assets into the same investment. As such, wealth or income requirements hardly mitigate the exposure to risks one bears. A far more appropriate risk mitigation tool would be to restrict the percentage of ones assets that could be held in private investments.
Furthermore, the current requirements suggest that individuals with upper class wealth or income are more sophisticated and adept in investing in private markets. While this perhaps is true on average, there are substantial examples to the contrary. Anecdotally, I have suspected a handful of wealthy heirs to have unknowingly flushed away part their familys wealth through a particular lack of sophistication regarding private financial markets. On the other hand, I have known individuals who are particularly sophisticated in the area of investment, who will perhaps one day meet the accredited investor requirements, but currently are young professionals and are both capable of and desiring of investing in private ventures, but do not yet meet the requirements. Similarly, many highly educated individuals, including college professors I have known, should be considered fully capable of investing in private ventures, but due to the nature of their careers, they have not amassed the wealth required.
Not only is the logic behind the current requirements irrational, but the resultant consequences are substantial. These requirements simultaneously prevent extremely capable and risk-aware individuals from generating future wealth through private investment, while allowing many unsophisticated yet wealthy individuals to be left exposed to significant losses. Given the excessive returns sometimes generated through private investment, limiting this practice to the particularly wealthy simply further consolidates wealth therein and prevents the generation of wealth, to a certain extent, by the less-wealthy, though potentially sophisticated, crowd that in many ways is comprised of the American middle class.
Current restrictions on accredited investors are troubling and un-American at best and both harmful and classist at worst. These restrictions need immediate reform to improve the freedom of individuals to make private investments as well as to help the American middle class generate wealth. I propose that requirements be shifted to focus on sophistication over wealth. Additionally, certain requirements on the percentage of assets that can be invested in private offerings could be used to further mitigate risk exposure more effectively than current requirements. Sophistication could be ensured through online education, such as that provided to college students who receive federal loans, or through educational and professional qualifications. Perhaps attaining a certain level of education or working in a particular industry would qualify an individual as sophisticated. For example, certainly a 20-something working for a private equity firm, who earns $150,000 per year, should be allowed to invest her own capital in private markets should she not? Similarly, a tenured professor of financial markets who earns $120,000 a year, yet lacks the required wealth should be allowed to invest a portion of her assets in private offerings, no?
Overall, these requirements need to be changed in order to champion free markets, help investment flourish and generate wealth for middle class Americans.
Anonymous Investment Banker