Determining Who Can Invest in Private Offerings

The Securities Exchange Commission revised one of the wealth requirements for individuals looking to invest in private offerings. The change was small and mandated by the Dodd-Frank regulatory overhaul law. This small change, however, has caused many to question whether the United States government should have the ability to decide what people can and cannot do with their money.

Specific dollar amounts have defined who is an “accredited investor” since 1982. Only accredited investors are, according to the S.E.C., sophisticated enough to invest in nonpublic deals. The S.E.C. uses two dollar amounts to determine who is an accredited investor: (1) annual income over $200,000 for an individual and $300,000 for a couple or (2) a net worth of at least $1 million. The commission removes an individual’s equity in a primary residence from consideration as required by Dodd-Frank.

Using money as the determining factor of who can invest in nonpublic deals may not be the best solution. Many wealthy individuals exist who do not have the training or sophistication to properly and effectively invest. On the other end of the spectrum, there are many individuals who do not meet the financial requirements of an accredited investor, but who have extensive knowledge and a superior understanding of investing in private offerings.

According to Walter J. Woerheide, vice president of academic affairs at the American College, a better solution for determining who has the ability to properly invest in private offerings is to administer a test, similar to a driver’s license test, that gauges a person’s level of financial knowledge.

See Paul Sullivan, Deciding Who’s Rich (or Smart) Enough for High-Risk Investments,  The New York Times, Jan. 13, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.