US Markets
Tuesday, December 19th, 2023 3:02 pm EDT
Key Points
- Inflation Increases Number of Accredited Investors: Inflation has led to a significant increase in the number of accredited investors, who are individuals qualified to invest in private companies, private equity, and hedge funds. According to the Securities and Exchange Commission (SEC), over 24 million U.S. households, approximately 18.5% of them, met the criteria for accredited investors in 2022. This represents an increase of 8 million households from 2019, with inflation being identified as a major contributing factor.
- Accredited Status and Consumer Protection: Accredited status is considered a consumer protection measure, as it imposes certain financial requirements on households to ensure they are financially sophisticated and can handle the risks associated with private investments. To qualify, households must meet specific criteria, such as a minimum net worth or annual income. However, the thresholds for accreditation have not been adjusted for inflation since their creation in the early 1980s. As a result, more people have gradually become accredited over the years, raising concerns among consumer advocates.
- Debate Over Private Investments: The article highlights the difference between public and private investments, with private investments allowing individuals to invest in companies not listed on public exchanges. While some argue for broader access to private investments, citing potential higher returns, others express concerns about the lack of transparency and increased risks associated with private markets. Private investments are also characterized by illiquidity, requiring investors to lock up their money for extended periods, which can pose additional risks for some investors. The shift from pensions to 401(k) plans and the overall increase in retirement savings have contributed to the growing number of accredited investors, according to the SEC. The SEC suggests that excluding retirement savings from the net-worth calculation would result in about 5 million fewer accredited investors in 2022.
The Securities and Exchange Commission (SEC) reported that over 24 million U.S. households, about 18.5% of them, qualified as accredited investors in 2022. This marked an increase of approximately 8 million households from 2019, driven largely by inflation. Accredited investors are individuals who meet specific financial requirements, such as a minimum net worth or annual income, allowing them to invest in private companies and various investment vehicles, including private equity and hedge funds.
Accredited status is considered a consumer protection measure, ensuring that investors are financially sophisticated and capable of bearing the risks associated with private investments. The thresholds for accreditation, established in the early 1980s, have not been adjusted for inflation. Consequently, more individuals have become accredited over the years as wealth and incomes naturally grow.
To qualify as an accredited investor, an individual must generally have an annual earned income of $200,000, or $300,000 for married couples. Alternatively, individuals or couples can qualify with a total net worth of $1 million, excluding the value of their primary residence. These thresholds, however, have remained unchanged since their inception.
If the financial standards had been indexed to inflation since the 1980s, a married household would need a net worth of approximately $3 million or a joint income of $911,352 to be accredited in 2022. This adjustment would reduce the number of qualifying households to about 5.7%, or 7.4 million.
Consumer advocates, such as Micah Hauptman of the Consumer Federation of America, express concerns about the growing pool of accredited investors. Without adjustments for inflation, it is projected that, by 2052, nearly 66% of households, or approximately 119 million, would qualify as accredited investors. Hauptman emphasizes the need to address this issue to prevent the accreditation standard from becoming meaningless.
Private investments, available only to accredited investors, differ from public investments in their transparency and liquidity. While some argue for broader access to private investments due to potential higher returns, others highlight the lack of transparency and additional risks associated with these investments. The shift from pensions to 401(k) plans and the overall increase in retirement savings have also contributed to the growing number of accredited investors over time. The SEC suggests that excluding retirement savings from the net-worth calculation would result in about 5 million fewer accredited investors in 2022.
For the full original article on CNBC, please click here: https://www.cnbc.com/2023/12/19/inflation-adds-millions-of-new-accredited-investors-sec-says.html
