I was reading an interesting article the other day that had to do with the OWS movement giving some data on the background of the “top 1%” and the “top 0.5%”. Can’t say I agree with everything in this article, but it was still worth a read. What really stood out to me though was the realization that the SEC’s accredited investor rules (Rule 501 of Reg D) basically mean that you have to be almost into the 99th percentile (maybe the 98.5th percentile) in order to be considered competent by the SEC to make investments for yourself in privately traded companies. This means that you could be wealthier than 95 or 98% of Americans, and the government still doesn’t think you’re capable of wearing big-boy underpants (or big-girl panties) and making your own investment decisions on privately traded firms. The even more surprising thing to me is that it looks like the $1M net worth (excluding the value of your primary residence) number has been around for a long time. I can’t tell from sure without doing more digging than I want to do for a short blog post, but if this is really as old as the 1933 law it is part of (which it looks like it is from a few glances), at that point, accredited investors were probably the top 99.75th percentile.
Now, even though I’m pretty libertarian, I can at least empathize with the goal of not letting poor widows get screwed by unscrupulous privately-traded companies…but we put the people in the 90th and 95th and 98th percentile in this same category? Sure, privately traded companies, and especially startups can be pretty risky–even in strong and growing industries. But really these days, investing only in publicly traded companies is no guarantee that you won’t get screwed. There are all sorts of ways investors are allowed to do financially suicidal things with publicly traded companies, but aren’t allowed to take any risks with privately traded ones, even if they’ve managed to build net worths of several hundred thousand dollars not counting equity in their primary residences.
I just wonder what the investment environment would be like if the accredited investment rules had a cutoff bar of $500k vs. $1M. Not that it’ll ever happen, just surprised to realize how high of a bar current accredited investment rules really are for investment.
That is all.