Almost every country has a regulated system where investors and businesses can connect to satisfy each other’s needs. How that system is regulated is an entirely different conversation, but investors invest their money in businesses to earn a return to build their wealth for retirement while businesses seek investments (capital) to startup, maintain, or grow their business. It’s a match made in Heaven. Almost.
Accredited Investor Defined
The U.S. Securities and Exchange Commission (SEC) is responsible for enforcing federal securities laws, proposing rules, and regulating the stock and option exchanges, the securities industry, and the electronic securities market in the U.S.. The SEC on the creating the “accredited investor”:
“The accredited investor definition attempts to identify those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary”
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Okay, pretty narrow…but we still don’t know who qualifies as an accredited investor. The basic qualifications for the title include:
- Earned $200,000 in the last 2 years and expect to this year ($300k if joint, married)
- Net worth exceed $1,000,000, individually or jointly with spouse, excluding the value of their primary residence
The SEC limits the type of investments non-accredited investors have access to due to the abnormal level of risk associated with those investments. However, higher risk equals higher expected return. Americans who are worth less than $1 million or make less than $200,000 a year are being “protected” from “unaffordable losses.”
For example, Average Joe makes $50,000/year salary and has saved up $100,000 in his retirement account. The SEC wants to prevent Mr. Joe from losing his retirement in a higher-risk investment because it took him his entire career to save those funds in his retirement account after paying bills. He is therefore being protected from suffering “unaffordable losses.”
For Millennials who are graduating in 2016 with, on average, $37,172 in student loan debt, this accredited investor qualification is a tough achievement. I mean, just owning a home seems to be a stretch for the generation considering Americans 35 and under who own a house has dropped from 36.8% in 2013 to 36.2% in 2014, the lowest ever in the census’ Housing Vacancy Survey. Even for anyone over the age of 35, becoming an accredited investor anytime soon is unlikely unless executives in your company are leaving soon and you’re up next! Given the level of disruption in our economy, from big data to augmented reality, trends are showing meaningful changes.
It is no question that Millennials are the largest part of the labor force and on our way to becoming the most educated generation…are we not in a position to have acquired the knowledge necessary to gain “financial sophistication and the ability to fend” for ourselves? Yes.
