Thanks to the innovation of mobile banking and investment apps, investing is more accessible now than ever before; however, due to some outdated restrictions from the Securities and Exchange Commission (SEC), the non-rich are still barred from cashing in on big opportunities. It’s time to scrap these regulations and establish a level playing field for all investors — rich or poor. If Republicans take control of Congress today, we could be a lot closer to making that dream a reality.
Under Regulation D, the SEC prohibits people without a high income or established net worth from investing in opportunities that can provide outsized returns. People who make less than $200,000 a year or $300,000 with a spouse and those with a net worth under $1 million dollars (excluding primary residence) — that’s about 90% of American households — aren’t allowed to invest in certain assets, like real estate syndicates or start-up companies.
All that will be reexamined, however, if the Republicans win back control of Congress. It would pave the way for House Financial Services Committee Chairman Patrick McHenry R-NC to execute his plan to expand the definition of an accredited investor. McHenry’s Capital Formation Agenda involves expanding the accredited investor definition to include anyone who invests 10% of their greater annual income or net assets. That wouldn’t fix the issue entirely. Those unable to invest that percentage of their income would still be barred from specific types of investments. Still, it would be a huge step in the right direction.
Innovation in the fintech industry has led to an increase in investing even with minimal sums of money, yet the SEC currently prohibits some types of riskier investments in order to “ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss.” To the SEC, wealthy = financially sophisticated, and middle-class = financially stupid. So, to protect middle-class investors from hurting themselves, they bar them from massive wealth-building opportunities. Meanwhile, the rich get richer and avoid competition for capital.
Such financial discrimination is simply unfair.
One of the biggest access points to wealth generation is investing in private companies before they become public or in syndicate real estate deals that generate regular income. These deals are only available to “accredited” investors. For example, an accredited investor can use CrowdStreet, a real-estate crowdfunding investing platform, which provides the ability to invest in hotels, storage units, large apartment complexes, and medical offices around the country. One hotel deal may cost $60 million, a sum most investors could not afford on their own, but through these platforms accredited investors can invest as little as $25,000 to become a partial owner. Following the conventional finance advice to save 20% of one’s income, that’s a sum that ought to be attainable for a household making $125,000. Indeed, the average 401(k) of an American thirtysomething is $38,400. It’s not like the middle class doesn’t have the means to make these investments. They’re just denied the opportunity.
Not only do accredited investors (i.e., the wealthy) diversify assets outside of stocks and bonds, but they also receive tax breaks for doing so. Taxpayers can only deduct $3,000 in investment losses per year on stocks, bonds, and more, but real estate provides more tax-breaks due to depreciation write-offs.
The SEC can claim they care about everyday people losing money, but it seems like they’re simply picking and choosing winners. If the SEC wanted to help the poor and middle-class build wealth, they would create more financial education resources beyond the very basics on their website, do educational outreach programs, and actually teach people what to look for when investing in a private vs. public company.
It’s time the SEC allowed the middle-class and the poor to partake in investments the rich have had access to for years. It is not the poor and middle-class who are unsophisticated, rather it’s the SEC’s class-conscious accredited investor rules.
Danielle Zanzalari is an Assistant Professor of Economics at Seton Hall University, Garden State Initiative Contributor, and Young Voice Contributor. She writes personal finance lesson plans for high school students across the country and deeply cares about personal finance education.