The government has a bunch of weird and dumb rules. Anybody who flies commercial has experienced this.
It’s hard to see how taking off your shoes makes air travel safer — especially when the bad guys can just try a different tactic, and TSA failure points have been demonstrated over and over — but the rule persists anyway.
The “accredited investor” designation is another such weird and dumb rule, perpetuated by government decree.
The idea behind the accredited investor rule is that mom-and-pop investors need to be protected from their own worst instincts, and further that the optimal sorting mechanism for this is how much money a person has.
So, if you have an income of $200K or higher, or at least $1 million in net assets apart from your house, you are considered an accredited investor, which means you are “sophisticated” and can invest in whatever you want.
However: If you have an income lower than $200K, or less than $1 million in net assets, you are not among the accredited and thus at dire risk of being “unsophisticated.” As such, the government restricts you from all kinds of investment offerings for your own good. You aren’t even allowed to look at the offerings in most cases — if a hedge fund or a startup lets a non-accredited person see their materials, they might get in trouble.
The accredited investor rule is silly for multiple reasons. For one thing, the notion is laughable that investors with more money are “sophisticated” in comparison to those with less. Investors can have not just millions, but billions under management and yet still be gullible goofballs.
Just look at SoftBank — they put billions into WeWork, and then incinerated billions more throwing good money after bad. Was that decision any more sophisticated than, say, burning a few grand on your cousin Larry’s light-up baseball hat business? It’s hard to see how. Only the scale is different.
The Securities and Exchange Commission (SEC) wants to loosen the restrictions now, but only by a little bit. On Dec. 18, an SEC proposal passed by a vote of 3-2 that would expand the accredited investor qualification threshold.
Under this new proposal, having an entry-level stockbroker’s license, or something comparable, would give you accredited status independent of any salary or net worth requirement. The presumption is that, if you have the financial chops to be a stock broker, you have the mental capacity to decide whether a hedge fund or startup or private equity venture is a good thing to invest in.
Although, once again, the logic seems backward. If people with less money can gain accredited status by demonstrating financial knowledge, what about people with lots of money and zero financial knowledge? Why do they get to skate?
Wouldn’t someone who, say, inherits $50 million but can’t do math be at greater risk of financial self-harm than someone with a few thousand? Or what about lottery winners and professional athletes, two groups that notoriously go from “multi-millionaire” to “post-career broke” in alarmingly short periods of time?
The good news, at any rate, is that the SEC may be creating a back door for anyone with access to a killer opportunity, but who finds themselves locked out due to accredited investor restrictions.
If you really want to claim your spot in that startup or hedge fund you somehow gained a door into, you can study up and get a broker’s license just to make the investment (assuming the proposal is finalized into law).
Then, too, future inflation could be the ultimate back door for accredited investor status.
The SEC debated whether or not to index the accredited investor requirements to inflation, meaning the $200K salary and million-dollar-net-worth requirements would go up in line with inflation over time. On that question they decided that, no, the numbers would stay at non-inflation-adjusted levels.
That lack of inflation adjustment makes a real difference, as shown by the number of Americans who qualify as accredited investors. In 1983, there were 1.31 million American households that met the accredited investor designation: Yet in 2019 there were 16 million, according to the Wall Street Journal.
So maybe the return of inflation — with a likely vengeance, as a result of the long-term debt cycle and the pendulum swinging the other way — will be the ultimate solution to this whole accredited investor thing.
With enough debt monetization and fiat currency depreciation, even the barista at the local Starbucks might have a fiat income of $200K or more — and then we’ll all be accredited all across this great land.
TradeSmith Research Team