I recently saw someone post on social media about their momentous achievement of reaching “Accredited Investor” status. For context, that’s the financial equivalent of 10,000 Benjamins, 40 college degrees, a 3 year stay in a 5 star NY hotel, 4 Lamborghinis, or your very own private island. Amassing $1 Million in net worth is quite an accomplishment and one that (in many cases) I would applaud. But sadly, when it comes to investing, accreditation – like age – is just a number. It wasn’t always this way though. In order to understand how we got, here let me take you on a brief trip back through investing time.
Once upon a time (1933) in a land far away,(Congress) the “powers that be” passed the Securities Act of 1933, a law designed to outlaw the private sale of unregulated securities(aka ownership and debt in companies), which had begun to resemble the wild west, only with less gun slinging and more disappearing life savings.
The SEC served investors well at first, requiring certain legal protections, disclosures, reporting and general transparency around what was being sold. But as businesses grew and evolved, the mounting complexities, requirements, and costs that surrounded a public offering slowly weeded out more and more ventures seeking outside capital. The SEC responded in 1982 with an exemption to filing publicly dubbed Regulation D.
Reg D allowed ventures to accept investment without the hassle and cost of a public offering. It also ushered in the 2 tier system we know as “Accredited” and “Non-Accredited” investors. In order to buy these hot new private securities, you had to have least $1 million (your primary residence was later excluded, thanks alot housing market crash…) or annual income of at least $200,000 for the last two years. ($300,000 for married couples, aka the better together rule).
The logic was sound: if you had a lucrative job or a lot of money in the bank, you could stand to lose a few dollars on a bad investment. Because one of the timeless truths of investing is that it’s risky and you could lose everything you invest. It wasn’t until 2020 that the accredited investor definition was finally amended to extend beyond just the numbers in your bank account. On December 9th the SEC passed an amendment allowing specific professional certifications and credentials including Series 7, Series 65 and Series 82 licenses to qualify investors as “accredited.”
But for the majority of Accredited investors, the assignment remains simply a number. So while the accredited status does extend access, it doesn’t offer protection, or security, or quality of deals, or really anything other than the legal go-ahead to play the private investing game. In fact, the status was predicated on the idea that you didn’t need all those additional protections because you had the money to lose.
While this was helpful for separating out and protecting the most financially vulnerable investors, (namely those who didn’t have it to lose) it didn’t offer much help to those who were able to place private investments. This pool of investors only grew larger with Title III of the JOBS Act (Reg CF). Reg CF threw open the door(with strict protections and requirements) allowing anyone to invest (accredited or not) in private ventures.
This is where we pause briefly to revisit our old pal Reg D. The regulators included some interesting phrasing that’s more relevant now than ever. Under certain rules, Reg D allows up to 35 Non-Accredited investors to join the round, provided they are “sophisticated.”
Sounds fancy huh?
The SEC loosely defines “sophisticated” as having “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”
Shouldn’t that really be the aim of all investing? Shouldn’t we be creating environments that help investors understand “financial and business matters” while properly preparing and vetting the deals so they can make informed decisions about the “merits and risks of the prospective investment?” With the rise of syndication horror stories and the ubiquity of online investing, the need for sophistication is at an all time high.
While investors are certainly responsible for their own actions, what if we focused more on the quality of the investor’s information than the quantity of dollars in their bank account? Maybe those creating access would better serve the market by providing education instead of gamification.
As the lines between “accredited” and “non” blur even further, the difference between sophisticated investing and gambling becomes more and more clear. What if we collectively raised the bar on what we expect from our investments and the people who facilitate them. What if investing wasn’t about checking off regulatory boxes, but about creating wealth through secure, informed, transparent decisions.
If accreditation is about what you have, sophistication is about what you understand. So while some may still strive for a status, Vicinity is striving to create a community unified by their collective access to opportunity powered by the tools and insight to act on it.
While securities laws often focus on protecting investors, maybe what we really need is a collective commitment to better decision making. What if we removed current wealth as the criteria for building future wealth? Instead of focusing on limiting the public’s exposure, what if we worked to increase their sophistication? In a time where access and wealth have never been higher, we’re focused on equipping our community with the knowledge and transparency needed to invest with trust and confidence.
And if a few “accredited” investors get minted in the process? You won’t hear us complain. =)