Accredited Investor Definition – SEC Proposal – Index Net Worth and Income Requirements to Inflation
This proposal is similar to the SEC proposal discussed earlier. It seeks to address the fact that the income and net worth requirements for an accredited investor have not been changed since 1983. In the previous case covered on this blog the SEC proposal was to take the 1983 numbers for income and net worth and increase them immediately by the cumulative inflation multiplier since 1983. This proposal starts with the original 1983 numbers and suggest that we increase them yearly by inflation.
Obviously, in 1983 $200K-$300K per year in income or $1M of net worth placed someone in a loftier percentile of the U.S. economic strata than it does now. In fact, these qualifications were met by only 1.8% of U.S. households in 1983. By 2013 4.1% of U.S. households met at least one of these standards. This is still a distinct minority of the households in the country. It’s difficult to argue that these standards enable people who shouldn’t consider investing in private offerings to do so. These households are in the top ~4% of the U.S. population. In the abstract that does not strike me as enabling those without the financial capacity to assume the risk to invest in private offerings.
The apparent intent is to tighten the accredited investor definition in a way that would stabilize the percentage of the U.S. population would be able to invest in private offerings. The SEC could argue that this is a matter that has been left unattended for too long. By this logic you would also be saying that the percentage of the population (doubling from 1.8% to 4.1% from 1983 to 2013) is the ceiling on the portion of Americans that should be able to make this type of investment.
Thinking only of investments in tech startups, it’s hard to justify leaving out 96% of American households. It has become easier and safer to invest small amounts into private offerings for this type of startup. Firms like AngelList, FundersClub and SeedInvest have made this possible. These online investment players have also provided an extra margin of safety.It’s easy today to follow an investor syndicate, assess its capabilities and cast your lot with an investor or syndicate that you are comfortable investing along side.
This SEC proposal works to limit access by raising the income and net worth standards each year. Could it be that the income and net worth standards are being made obsolete by the development of new ways to invest? It’s possible to do $5k-$10k investments on the sites listed above. In my view it’s hard to argue that interested Americans should not be able to risk such amounts as long as the risks are clear.
This proposal would keep the ability to invest some portion of savings in private offerings away from the vast majority of U.S. households. At a time when these opportunities are becoming more available, transparent and de-risked indexing the income and net worth requirements to inflation is a move in the wrong direction.