In August of 2020 the Securities and Exchange Commission (SEC) narrowly approved a vote to expand its definition of who qualified as an accredited investor.
Previously, an investor needed to be an “Accredited Investor” which is to say they needed to have $1 million in net assets, not including their primary residence, or more than $200,000 in yearly income. Those restrictions have now loosened up, though.
Paul Kiernan of the Wall Street Journal provides more detail, citing how proponents of this change argue that it makes investing less discriminatory against those who are not already wealthy.
Those in favor of this change feel any well-informed person should be able to analyze the risks and potentially benefit from this system, regardless of whether they are just starting out financially.
Being well-informed doesn’t mean just reading a few articles online, though. This change primarily applies to certain professionals whose focus is finance. For instance, those with an entry-level stockbroker’s license, or employees at nonpublic firms who are deemed to be knowledgeable.
It should be noted that were it not for this vote from the SEC, the financial prerequisites to qualify as an accredited investor would have likely increased significantly. The current wealth requirements have not been adjusted for inflation, and the approved vote will keep it that way.
And since job incomes have continued to grow, this makes it likely that we will see more people who qualify under the wealth and income requirements as well.
For comparison, just 1.31 million households met the financial requirements in 1983. In 2019, that number was 16 million households nationwide.
This presents another option for individual investors to broaden their horizons without needing to take years to establish themselves or seek out favor from a wealthy associate.
Fred Hubler, Chief Wealth Strategist for Creative Capital Wealth Management Group has been working with accredited investors and accredited investments since he started his firm 18+ years ago. “One of the hardest parts of my job,” Hubler said, “is knowing there are investments that some people should have but don’t qualify for.”
To address this inequity, Hubler has been looking for investments that are less correlated to the market but do not require an investor to be an accredited investor.
“There are not many but we found a few we like and have sprinkled those strategies in our portfolio to give non-accredited investors more than just public stocks/bonds/funds,” Hubler stated.
Now more individuals will be able to take part in investing in hedge funds, startups, and private-equity funds. While that is a valuable option to contemplate, naturally any such decisions should not come before consulting a reliable financial assistant.
If you are looking for more information pertaining to these changes for investors, make sure to read the Wall Street Journal’s article here.
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