- >SEC Expands Criteria for Accreditation, but Still Lags Behind Crypto
SEC Expands Criteria for Accreditation, but Still Lags Behind Crypto
The US SEC just expanded the set of rules that dictates whether or not individuals can be accredited investors. The SEC (Securities and Exchanges Commission) is the governing body that regulates the investment industry through a variety of means. It is huge to have this regulatory body expand the definition of what an accredited investor is. It is important to know exactly what this means for individuals. Beforehand, being an accredited investor was based on your net worth. Now, there is the ability to become an accredited investor after taking a series of tests. To put it simply, instead of just wealth, aptitude is also sufficient for becoming an accredited investor.
Keegan Francis | Oct 14, 2020
The Benefits of Being an Accredited Investor
Accredited investors gain automatic access or clearance to investment opportunities. Being an accredited investor, you are allowed to participate in private fundraising opportunities. In order to be an accredited investor you need both the financial means, and the financial literacy to evaluate these opportunities. This is perhaps best explained by describing two common investment scenarios.
Raising Money through a Public Offering
This is a well known, and well established practice. Most people in the investment space know this event as an IPO, or an initial public offering. In the cryptosphere, these are called ICO’s or initial coin offerings. IPO’s are offered to anyone and everyone who wants to participate. However, you do need to be a registered investor account on a stock exchange that is participating in the offering. The company conducting the offering needs to put together thorough documentation on the nature of the investment opportunity. This documentation is required so that investors can make informed decisions on where they intend to invest their money.
Raising Money through a Private Offering
The other way to raise money is privately. Someone may offer individuals an investment opportunity directly. In order to participate in this opportunity, you need to prove that you’re an accredited investor. That is because private offerings are not regulated by the SEC in the same way. They are exempt from the securities laws that govern public offerings. People must take caution when being offered an investment privately. Many private investment opportunities inside and outside of the world of cryptocurrency are outright scams.
The Rich get Richer
The bar for becoming an accredited investor has been set rather high. Individuals need to prove of the following two things
- That they made $200k in the previous year, and will again in this year
- That they have a net worth of more than 1 million dollars
This is a bar that is simply out of reach for many individuals. Many people in the middle to lower class will never become accredited investors simply because the bar is set too high. Furthermore, the accreditation has always been determined by the amount of money one makes, instead of the knowledge you wield. This is one of the systems that are embedded within our current financial systems that perpetuate wealth inequality. Not only are these investment opportunities only available to the rich, but they may hire someone to make them.
The World of Cryptocurrency has No Accreditation
One of the biggest realizations for me after having invested in cryptocurrencies, is that you need accreditation to invest in other capital markets. Accreditation is just a fancy word for permission, and I don’t like asking for permission to use my money. I started investing in cryptocurrency before I even considered looking into investments on the regular stock market. By design, the world of cryptocurrency is open for everyone and anyone to invest in. This obviously makes the stakes much higher, because there are no protections if you lose your money. This fact is akin to you losing your money if you make a mistake with your cryptocurrency wallet.
Within the cryptocurrency world, there are typically no minimum investment amounts. This means that you may invest a dollar in an ICO, or a million dollars in an ICO. The point is, the investment size in the world of cryptocurrency is whatever you can manage. This is a far more reasonable approach for the average individual. Not everyone has the time or knowledge to determine the efficacy of investing $10k of their savings. For most people, a drip investment of $5 per week is a far more reasonable investment strategy.
Accredited Investors Can Now Also Be Smart
The SEC just changed the criteria for becoming an accredited investor. Instead of having the criteria be entirely based on net worth, it is now also based on intelligence and know-how. You may prove that you know what you’re doing as an investor after passing a series of tests. These tests are designed to test your overall financial literacy and sophistication. This is a huge leap forward for the investment industry because all of a sudden, way more people will have access to investment opportunities.
The Economy Thrives on Investment
Economies thrive when there is activity within them. Laws tend to stifle this by only allowing certain members of society to take certain actions. By opening up the criteria for accreditation, the SEC has simultaneously opened the floodgates for more capital to flow into the markets. One sentiment that I’ve heard within the cryptosphere is that people prefer cryptocurrency, because it is unregulated. Maybe if there was less regulation, and not so many barriers to entry, they would consider moving some of their capital into the regular capital markets. There are lots of smart people making money with cryptocurrency markets because of intelligent investment decisions. The fact of the matter is that these people would benefit both themselves, and regular capital markets by being allowed to participate in them. Now they can.