Inflation, retirement savings growth expand pool of sophisticated investors

investmentnews.com:

The number of investors who qualify to purchase private securities has expanded substantially thanks to inflation and retirement savings, increasing the potential for investor harm, the SEC said in a report Friday.

Only investors who meet certain financial thresholds, hold certain licenses or credentials or fit in other limited categories can participate in private placement offerings. Those securities are exempt from registration with the Securities and Exchange Commission under a measure called Regulation D.

A cornerstone of Reg D is the accredited investor standard. Established in 1982 and amended a couple times since then, individual accredited investors must have $1 million in investible assets other than the value of their homes or make $200,000 or more annually. Investors who don’t meet that criteria can qualify if they hold certain credentials, such as securities licenses, or have specialized knowledge about the private placement.

The parameters for accredited investors are meant to identify investors who have the wherewithal to withstand losses that could occur with private placements, which lack the disclosure requirements and other protections of public stocks.

But the standard was not indexed for inflation, which means it now encompasses many more investors than when it was implemented more than 40 years ago, according to the SEC’s report. In addition, retirement savings that used to be ensconced in defined-benefit plans are now housed in individual retirement accounts, which count toward the net-worth prong of sophistication.

“Taken together, the increase in the size of the accredited investor pool over time as a result of inflation and the expanded role of retirement savings in qualifying as an accredited