Debate: Should Accredited Investor Rules Be Loosened?

Bloink: This proposal runs completely counter to recent SEC proposals that would instead raise the threshold for achieving accredited investor status. Accredited investor rules exist for a very specific reason. These rules are meant to protect average Americans who simply do not have the ability to withstand the extreme financial losses that risky investments can carry. These are valuable investor protection rules that should not be weakened.

Byrnes: Accredited investor status should not be based on financial status in the first place, but on the ability to make complex financial decisions and evaluate investment options on their own. The level of wealth any given investor has accumulated is not the only indication of the ability to appreciate risks associated with an investment.

Bloink: The financial threshold allows companies to avoid certain reporting requirements as long as most of their investors have “accredited” status. That means many investors do not have the full information that they would have from a public company before making their investment decisions.

By definition, that increases the risk of loss for investors — and because they don’t have such a solid financial footing, we run the risk of putting ordinary investors at risk of extreme loss by lowering the threshold.

Byrnes: The proposed 10% threshold is reasonable. It allows individual investors to evaluate an investment with the knowledge that they could lose a significant amount of money. If an investor has full appreciation of this potential risk of loss, there is no reason that they should be kept out of an investment merely because their net worth has yet to reach a certain arbitrary threshold amount.

Bloink: Simply lowering the financial requirements to qualify as an accredited investor does not take the entire picture into account. Individuals who have not accumulated substantial wealth can often ill afford to lose 10% of their income, if 10% of annual income does in fact become the new standard.

We would also have to require that the companies who take advantage of the accredited investor rules make sufficient public disclosures to allow investors to appreciate the full range of risks associated with the investment. Avoiding those public disclosures is one reason many companies take advantage of the accredited investor rules in the first place.

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