Accredited investors: Who should be admitted to the fold?

Following the U.S. House's adoption this summer of a slew of bills meant to expand the definition of "accredited investors," an SEC panel is taking another look at the criteria unlocking the door to many private and sophisticated investments.

The Securities and Exchange Commission's Investor Advisory Committee met at the federal regulator's Washington, D.C. headquarters on Thursday to discuss various possibilities for letting more investors look beyond stocks and bonds by putting their money into nonregistered private equity, hedge fund and venture capital vehicles. Many of these opportunities are now open only to so-called accredited investors, which the SEC defines as people with at least $1 million in assets (excluding their houses) and an annual income of at least $200,000 for the past two years for single earners and $300,000 for married couples.

A series of bills that earned bipartisan support in the U.S. House would loosen those restrictions in various ways. The Equal Opportunity for All Investors Act, voted out of the House on June 1, would allow investors who don't meet the criteria for being accredited to nonetheless put their money into sophisticated and complex vehicles if they passed a special securities test.

The Fair Investment Opportunities for Professional Experts Act, passed by the House on June 5, would expand the definition to include certified broker-dealers, investment advisors or others who have certain professional licenses or experiences. It's similar to an internal SEC order from Aug. 20 extending the definition of accredited investor to federal- or state-registered advisors and certain holders of brokerage licenses, among others. 

Still another piece of legislation passed by the House in June, the Accredited Investor Definition Review Act, would direct the SEC to review its criteria for accredited investors every five years and give regulators the authority to make any changes they deem necessary.

All of those potential laws are now awaiting a vote in the U.S. Senate. That didn't prevent the SEC Investment Advisory Committee from discussing possible changes to the criteria for accredited investors on Wednesday.

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Panel members' and guests' proposals ranged from revising the criteria so that they reflect current economic conditions and requiring periodic reviews, to barring retirement savings from being placed in nonregistered investments and providing ways for people of lower means to slowly move into sophisticated investing. The ideas could eventually find their way into a formal rule proposal that would be up for approval by the full SEC.

Speaking at the SEC's meeting Thursday, Usha Rodrigues, a professor of corporate finance and securities law at the University of Georgia, said the question is about how far the government should go to prevent people from making risky choices. 

Those who favor bringing more people into the "accredited investor" fold generally argue that savers shouldn't be excluded from possibly lucrative investment opportunities simply because they don't have or earn enough money to meet arbitrary asset and income thresholds. They also contend that the mere possession of sizable sums offers no guarantee that investors are sophisticated.

Rodrigues said there's a notion that accredited investor standards are one of the ways the rich are able to keep getting richer. The perception is, she said, "There are two types of economies: One for the wealthy, and one for the rest of us."

The investing website DQYDJ estimates there were nearly 13.7 million accredited investor households in the U.S. by the end of 2020. That came to just over 1 in 10 U.S. households.

Proponents of strict standards meanwhile think there is often too little public data on private placements and other investment vehicles reserved for accredited investors. That makes them inherently risky, they say, and best left to people who can afford to suffer losses.

The idea is: "These are dangerous waters where we need to be protective of the average investor because it's just too risky for them," Rodrigues said.

Investment advisors are equally divided on whether the current rules are strict enough or could stand some loosening. Tom Balcom, the founder of Lauderdale-by-the-Sea, Florida-based 1650 Wealth Management, said his firm works with many high income earners who haven't amassed enough money yet to qualify as accredited investors. These are the exact sorts of investors who could benefit greatly from being able to put their money in things other than stocks and bonds.

In such cases, Balcom said in an email, it's the advisor who will be "doing the due diligence on these investments and will most likely be allocating only a portion of … clients' portfolios into these investments."

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Lindsey Young, the founder of Baltimore-based Quiet Wealth, sees it the other way. She said many nonregistered private investment vehicles are complex, illiquid and significantly riskier than standard market options.

"Most of the investing public lacks the technical knowledge to evaluate the strategies and personnel of these funds," Young said in an email. "I am generally in favor of free markets, but in this case the risks of loosening the rules are significantly greater than the incremental portfolio diversification benefits that investors would receive by having access to these funds."

In remarks before the panel discussion Wednesday, SEC Commissioner Jaime Lizarraga said one drawback to nonregistered investments is that they don't provide investors with the sorts of up-to-the-minute market data that now comes with stocks and bonds. He noted the median income of U.S. households was $75,000 a year in 2022, according to the U.S. Census.

"Given the paycheck-to-paycheck realities that millions of working families in our country face, even those with six figure salaries, it is important that we remain cognizant of this, as well as our duty to protect investors," he said.