An accredited investor according to the Securities and Exchange Commission is an important designation because it establishes the criteria necessary for individuals to participate in private offerings not available to the general public otherwise. Under the current definition, there really is no specific accredited investor test one can take to pass and qualify as part of this investor class. Generally speaking, an accredited investor must meet certain annual income or net worth thresholds or hold certain licenses, such as Series 7, from the Financial Industry Regulatory Authority (FIRA).
Opening Key Investments to Those With the Right Investment Skills
If the SEC created a specific test or exam to determine who met the standard of accredited investor, it could help open up a range of investment opportunities to investors who actually have the knowledge and skills required to handle the risk of these investments. With a greater quantity of accredited investors in the market through the use of an accredited investor test, business owners would have more opportunities to raise capital and contribute to the economy and job growth.
Many Americans today are shut out of some of the most profitable investment opportunities because they fall short of the required income and net worth criteria set by the SEC. These restrictions keep out of certain opportunities at the very time in which they are the most profitable, which is during the growth stage of a new business.
Indications of Financial Sophistication
Existing net worth and yearly income are not always the criteria that determine who has the necessary financial sophistication to make and manage more complex and riskier investments. Past accumulation of wealth is not a certain indicator of future, wise investment choices, and success. Expanding the definition of “accredited investor” through an accredited investor test to include those with less wealth, but verifiable financial sophistication would benefit more people overall.
Maintaining Caution With Any Proposed Changes
The above proposal of expanding the accredited investor definition to include a greater number of lower-income and net worth individuals does not mean there should be no income or net worth requirements to protect investors from significant financial loss. However, it does mean that financial sophistication independent of paycheck or quantity of cash in the bank should be given more weight.
