02-07-2025
Advisors Scrutinize Bill to Ease Rules for Accredited Investors
Being an accredited investor just isn't what it used to be.
A bill designed to loosen the definition of an accredited investor, one who's eligible to invest in certain private placements, is heading to the Senate after it passed the House of Representatives in resounding fashion last week. Advocates say the proposal would democratize private markets — like private equity, venture capital, hedge funds and real estate — which have long been reserved for the wealthiest investors. The bill would ask the Securities and Exchange Commission to reevaluate the current definition and potentially provide a new one. It's yet another example of the industry opening up alternative products to Main Street investors.
'While this may be a step in the right direction for the asset managers, it remains to be seen if it is a step in the right direction for the new pool of potential buyers,' said Martin Gross, president of Sandalwood Securities.
READ ALSO: 3 Financial Planning Urban Legends and Will Client Testimonials Catch On With Advisors?
While the Fair Investment Opportunities for Professional Experts Act passed by a 397-12 vote in the House, it still has its detractors in the wealth management industry at large. Some financial advisors feel private offerings aren't necessarily the best idea for your average investing Joe. 'If there is no alignment of interests, clients should not invest,' Gross said. 'This is one area where understanding best practices around due diligence is essential.'
Most notably, the bill would open up the designation to holders of certain licenses, education, or job experience, like brokers and financial advisors. Proponents say a new definition would welcome financially savvy investors who don't meet the traditional income thresholds. According to the current criteria includes:
Investors must earn at least $200,000 (or $300,000 for married couples) in each of the prior two years.
Or, they are required to have a net worth over $1 million, alone or together with a spouse.
Anyone who holds a Series 7, 65 or 82 license.
Advisors will also need to pay attention to the liquidity needs of their clients, the exposures they have in other asset classes, and risk tolerances, Gross said, adding that alternative investments come with levels of complexity and due diligence not required in public markets subject to the Investment Company Act of 1940, a law that protects investors by reducing conflicts of interest and improving transparency. Like it or not, current accredited investor rules exist for a reason, he said.
Keeping it Accredited. Private markets are 'inherently complex and opaque,' and any new definition must focus on giving investors and investment managers the education and tools necessary to assess the risks, John Bowman, CEO of the CAIA Association, said in an email. Still, expanding the accredited-investor definition is long overdue. 'Sophistication is not solely a function of wealth and is a positive step toward democratizing access to private markets,' he said.
We're still waiting on Congress to democratize access to vacation homes on the French Riviera.
This post first appeared on The Daily Upside. To receive financial advisor news, market insights, and practice management essentials, subscribe to our free Advisor Upside newsletter.
