Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
Thumbs up, thumbs down images

Regulation and Compliance > Legislation

Debate: Should Accredited Investor Rules Be Loosened?

By Robert Bloink By William H. Byrnes

X
Your article was successfully shared with the contacts you provided.

The House Financial Services Committee on Wednesday passed a series of bills that would loosen the requirements for an individual to be an “accredited investor” — a status that gives them access to investments that are not registered with regulators.

One of the bills would impose requirements to ensure that the investment itself was not greater than 10% of the individual investor’s annual income or net assets.

In other words, if the proposal were to become law, an individual investor could qualify for accredited investor status regardless of how small their net worth or income was.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about lowering the financial threshold to quality for accredited investor status.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Thumbs down Bloink
thumbs up Byrnes

Their Reasons:

Byrnes: Net worth is not the only way to determine whether an investor can evaluate and appreciate a risky investment. Hardworking Americans should be given the same opportunities to participate in valuable investments as wealthy taxpayers.

Lowering the financial threshold required to qualify as an accredited investor would create opportunities for average Americans with the financial knowledge necessary to make complex investment decisions without regard to the amount of money they have accumulated thus far in life.

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.

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.

Robert Bloink

William H. Byrnes

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.