The Securities and Exchange Commission (SEC) is considering a potential change to the definition of an Accredited Investor, specifically by raising the wealth threshold. Currently, an individual qualifies as an Accredited Investor if they earn over $200,000 per year or have a net worth of over $1 million, excluding the value of their primary residence. If married, the salary threshold increases to $300,000.
One proposal being considered is indexing the wealth metric to inflation since the Accredited Investor definition was established in 1982. If this change is implemented, the wealth threshold would be approximately $3.18 million today.
To better understand the implications of this potential change, it is worth noting that the top 2% of individuals in the US have a net worth of around $2.572 million, as reported by Kiplinger. The top 5% hold just over $1 million, while the top 1% possess more than $10 million.
Furthermore, an estimate suggests that there are currently 5.67 million households in the US, equivalent to 4.41% of the population, with a net worth exceeding $3 million. Drilling down further, approximately 3.48% of households possess $4 million in wealth, accounting for 4.473 million households. Additionally, the percentage of households with a net worth of $5 million is 2.79%, or 3.592 million households.
It is important to note that these percentages likely include the value of the primary residence. Additionally, these figures are not fixed, as fluctuations in the market can impact an individual’s overall wealth.
Considering the potential ramifications of the SEC’s proposed changes, it is evident that if it becomes more difficult to qualify as an Accredited Investor, the pool of eligible investors will significantly diminish. This could potentially be viewed as another act of distancing the majority of the population from participating in private securities offerings, which carry high-risk but have the potential for substantial returns. It is essential to recognize that private securities play a critical role in fueling innovation and driving job creation, therefore impacting this sector may jeopardize economic growth. This begs the question of whether policymakers truly desire such an outcome, as it appears that some do.
While the final proposal from the Commission remains undisclosed, it can be assumed that it will not favor the private markets or online capital formation.
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