One of the most unfair and egregious class warfare practices in the market today is the “accredited investor” requirement for investors to participate in one of the greatest moneymaking investments in the world: private equity.
Want to see the very epitome of the 1% versus the 99%? Read a private placement application.
But let me back up and give you some history…
We’ll start from the beginning, when the stock market crashed in 1929 and millions of investors lost everything.
They complained that they were the victims of Ponzi schemes, pump and dumps, and front running by unscrupulous traders.
To relieve the investing masses of the risk and dangers of these supposed hazards, the concept of an accredited investor was introduced to the American markets in the Securities and Exchange Act of 1933 — the very same piece of legislation that created the Securities and Exchange Commission.
What this law served to do — in one quick stroke — was “protect” a large majority of private investors from the risk inherent to the private equity sector by simply barring them from ever participating.
In short, if you’re not accredited, don’t worry about losing everything. Because you’ll never get to invest in the first place.
In order for an individual to qualify as an accredited investor today, he or she must accomplish at least one of the following:
1) Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years, and expect to reasonably maintain the same level of income;
2) Have a net worth exceeding $1 million, either individually or jointly with his or her spouse;
3) Be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.
These investors are considered to be fully functional without all the restrictions of the SEC.
An employee benefit plan or a trust can qualify as accredited investor if the plan has total assets in excess of $5 million.
For reference, that salary requirement alone would put the poorest accredited investor in the 94th percentile across all U.S. residents.
If you’re retired or semi-retired, or if you made your money some other way than drawing regular paychecks, you need to move up into the 96.5th percentile by having $1M in transferable assets to your name.
So in case you’re wondering what the ultimate image of economic-based discrimination looks like, this is it right here. No need to drive to the nearest hoity-toity country club.
Based on the numbers alone, there’s either a 94% or 96.5% chance your own Federal Government is doing it to you this very moment.
As an accredited investor myself, I can tell you what it means to step through those magical (albeit symbolic) gates for the first time…
No longer limited by the parental controls of a government that has rarely demonstrated any competence to speak of when it comes to its own financial decision-making, you are finally free to seek out and participate in early-stage investment opportunities offered by companies whose stock is either unavailable, or available only at retail (read: much higher) prices.
Private placement deals comprise a major component of start-up and early development financing for mining companies, energy companies, and tech companies, with trade-restricted stock going to connected investors for pennies on the dollar.
You usually read about these deals in press releases. They often spark rushes on the retail market as the unaccredited masses try to get a piece of the pie…
Companies like Google, Apple, and every other multi-billion-dollar household brand all went through their early-stage financing cycles during which only the wealthiest were allowed to take part.
I guess that’s sort of the government’s way of patting you on the head, while leaning forward and whispering to entrepreneurs that you’re special — but that your money isn’t quite green enough to come out and play with them.
I’m fairly certain all money is equally green. And once it’s yours, you should be able to do with it as you want.
The problem this creates is more than just discriminatory. The ripples it sends through the socioeconomic landscape of this country over time tend to reinforce and strengthen one another. And after several generations of this systematic economic segregation, the rift in the classes has grown to where it is now.
Forget about 94% and 96.5%… Today, it’s all about the 99%, even the 99.9%.
And if you think this enormously imbalanced allocation of wealth is the fault of the super-rich, you’re failing to see the big picture.
Without help from the Securities and Exchange Commission, today’s wealth divide would be a fantasy in the mind of science-fiction writer.
Unfortunately, because the rich and poor alike are all inherently dependent on a strong and vibrant middle class, it is all of our reality.
I know this is all very frustrating and, once you grasp the full magnitude of this problem, painfully unfair.
However, I think we may have just found a way around this legislative injustice…