By Joe Endoso, Chief Operating Officer, Linqto
Investing is one of the greatest inequities in the United States today. People with a million dollars invested in public equities, for example, will grow their wealth faster than individuals with only $100,000 invested in the same companies. However, the problem goes beyond that. Million-dollar investors have access to higher returns than their counterparts. Specifically, they have access to an entire investment class called alternatives. Unfortunately, only accredited investors can invest in alternatives. Thankfully, a new proposal in Congress is looking to make it easier to become an accredited investor to level the investment playing field.
To demonstrate the current unfairness, a Cambridge Associates report compared the returns of 2,332 venture capital funds to an adjusted public index over 25 years. The report showed that the venture capital funds averaged 25% annualized returns, while the NASDAQ composite returned just under 10%.
Currently, the guidelines for accredited investor status are unfair and may exclude many deserving people. To qualify, an individual must have a net worth over $1 million (excluding their primary residence), a personal income of $200,000 ($300,000 with a spouse) in the past two years, or hold a FINRA Series 7, 65, or 82 license. Simply put, wealth doesn’t guarantee good investing decisions. Thankfully, the House of Representatives has proposed an update to the current guidelines. The “H.R. 2797 – Equal Opportunity for All Investors Act of 2023,” introduced by Representative Mike Flood with bipartisan support on April 24, 2023, proposes allowing an SEC-administered test, enabling anyone demonstrating a certain level of proficiency to qualify as an “accredited investor.”
A knowledge-based accreditation system has several benefits. For example, knowledgeable investors can build larger, more diversified portfolios. Venture capital and private equity funds can create “retail allocations,” enabling retail investors to invest in these funds. Lastly, the proposal could benefit companies raising capital by enabling customer investment and increasing public interest in the company and its products.
Ultimately, it is time to overhaul the outdated accreditation system in the United States and embrace a knowledge-based accreditation system that will level the investment playing field, foster a more equitable future for all parties involved, and break down the barriers that have long favored the wealthy few. The Equal Opportunity for All Investors Act is a crucial step towards achieving this goal, and its passage would undoubtedly have a positive impact on the investment community. By providing more individuals with access to alternative investments such as private equity and venture capital, we will help drive innovation and growth for companies seeking capital, empower savvy investors, and create greater financial stability and wealth generation for a broader range of people. It is essential that we continue to push for reform in the investment world, ensuring that everyone has a fair shot at building a secure financial future. The Equal Opportunity for All Investors Act represents a significant stride in the right direction and marks a milestone for equity and inclusion in the United States investment landscape.
