The SEC reported that accredited investor numbers rose to 24 million in 2022 from 16 million in 2019, and are projected to continue increasing. Individuals who meet certain financial thresholds with regard to net worth or annual income can purchase investments such as private equity, hedge funds and venture capital funds, which, at one time, were only available to the top 2% of households. Currently, about 1 in 5 households can access these private investments.
The SEC has reported that inflation has allowed around 8 million more households, or 18.5% of the total, to meet the requirements for accredited investor status in 2022. This is a substantial jump up from the 13% of households that were accredited investors in 2019. Consumer advocates, however, are not in favor of this as it allows more individuals to enter private investments and companies that were originally intended for the wealthy. Requirements such as a minimum net worth and annual income exist to protect those who may not be able to handle the risk associated with certain investments. By 2015, that number had risen to 8.5 million, or 8.7%.
Individuals can become accredited by having an annual earned income of $200,000, or $300,000 for couples. Additionally, they can qualify with a combined net worth of $1 million, excluding the value of their primary residence. Unfortunately, the thresholds for accreditation do not increase with inflation, so more and more people have become accredited over time as their wealth and incomes naturally increase. In fact, the same standards have been in effect since the early 1980s - in 1983, only 1.8% of households (1.5 million) were accredited, but that number had risen to 8.7% (8.5 million) by 2015.
As the financial thresholds remain unlinked to inflation, the vast majority of Americans will be accredited investors in the decades to come. Per the SEC, by 2052, almost 119 million households – or 66% of them – will satisfy the requirements.Micah Hauptman, director of investor protection at the Consumer Federation of America, stated that if the standards remain unchanged, they will become outdated. He said, "The pool keeps increasing. If we don't do anything, the standard will be rendered meaningless."According to the SEC's data, if indexed to inflation since the 1980s, a married household in 2022 would need a net worth of approximately $3 million or a joint income of $911,352 to be accredited. Just 5.7% of all households, approximately 7.4 million, would be qualified.
Investing in stocks and funds on a public exchange is a common type of public investment. However, private investments offer access to businesses that are not publicly traded. Supporters of private investments cite their potential to offer higher returns compared to the S&P 500 index. A 2021 report from Michael Cembalest, chair of market and investment strategy at J.P. Morgan Asset & Wealth Management, shows that private equity returns outperform the S&P 500 by 1% to 5% on an annualized basis since 2009.
Some contend that private markets are not as open, with knowledge concerning companies and funds less accessible to the majority of investors, and come with extra dangers. According to Hauptman, "without having information, investors cannot gauge the value of the business in order to make an educated choice of investing." Private investments also tend to be less liquid, so investors should prepare to commit their funds for as long as 10 years in some instances, remarked Paul Auslander, a certified financial planner and director of financial planning at ProVise Management Group in Clearwater, Florida. This extended holding span can make them a riskier option for certain investors, he continued. "It's like any other investment," Auslander said. "You must scrutinize the details and ensure you know what you are committing to."
Aside from inflation, the SEC notes that trends such as the shift to 401(k) plans away from pensions have helped exacerbate the number of accredited investors. By 2020, approximately 85 million people were taking part in 401(k)-type plans, which is over three times the amount that participated in 1982. The inclusion of private retirement savings when determining net worth has also had an effect.
The SEC stated that the shift away from pensions may have posed investor protection issues that were not around in the early 1980s. This is because the duty of making investment decisions would move from employers to individuals, who may not have enough knowledge to regulate investment risk. If retirement savings were excluded from the net-worth determination, it could lead to a reduction of around 5 million accredited investors by 2022, as per the SEC.
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