Are You an Accredited Investor?
This is a follow up to my blog several weeks ago about crowd funding. The Securities & Exchange Commission (SEC) is additionally considering modifying the definition of an accredited investor as part of a proposal to amend the rule that permits the sale of private-placement securities. Lawmakers want the SEC to expand the definition so that there are more sources of capital available to fledgling companies and so that more investors can avail themselves of private offerings. An investor advocate is warning that expanding the pool of people who can invest in private offerings without appropriate safeguards will harm the investing public.
Currently, only investors that have a net worth of $1 million (excluding the value of their homes) or an income greater than $200,000 can buy unregistered securities or buy into private-equity and hedge funds. About $903 billion was raised by private placements with about 234,000 investors participating last year, according to an SEC study. Barbara Roper, director of investor protection at the Consumer Federation of America, said that the definition should be changed but not simply as a way to open the private-placement gates to more investors. She is wary of putting all the focus on capital formation rather than protecting the people providing the capital. “It just does not work,” Ms. Roper said. “We have been down that road before. It led to the Great Depression.”
One consideration is whether professional certifications, such as a certified public accountant (CPA) or chartered financial analyst (CFA), are among the possible supplemental or alternative criteria for qualifying as an accredited investor. Some feel that such a certification may better position an individual to be able to analyze a company’s financial condition and results of operations more comprehensively, while others believe that you can be a CPA but not know anything about investments.
Another proposal is to quality an investor who uses a financial adviser as accredited. “If you’ve hired an adviser, the adviser is standing in your shoes and doing what’s in your best interest,” said Karen Barr, Investment Adviser Association general counsel. “They’re serving as your proxy in this transaction.” However, the opposing view is that an investor’s use of such an adviser may not necessarily measure the investor’s understanding of the risks of the investment.
Even the current approach of using wealth as the yardstick for accredited investors doesn’t sit well with everyone. Some have commented to the SEC that it is tantamount to the government sanctioning a special club.
Many financial planners I know plan to continue to avoid recommending hedge funds, private equity, and private placements to clients regardless of whether or not they qualify as accredited investors due to such investments’ lack of transparency, liquidity and low cost.