The U.S. Securities and Exchange Commission is considering altering the definition of “accredited investor.” Brokerage firms and other securities sellers generally are permitted to sell private securities offerings, such as limited partnerships and many hedge funds, only to those investors who fall within the definition of an accredited investor. Many of the wide-scale investment fraud and Ponzi schemes that have taken place over the last five years have involved the sale of private placement securities that could be sold only to so-called accredited investors.

Understanding the Current Accredited Investors Rule

The current accredited investor rule permits sales of these risky securities to anyone with either more than a $1 million in assets excluding their home or income of $200,000 or more. The rule is premised on what we believe is the mistaken conclusion that anyone who meets these financial parameters is by definition a sophisticated investor. But the fact that someone has built up substantial savings really has nothing to do with their ability to understand complex investment products. By way of example, many home builders or other individual business owners are able to amass large sums of money as a result of their businesses that have nothing to do with securities. Those businesses do not provide the business owner with any education or level of sophistication regarding complex securities. Yet, because of the simplistic accredited investor definition, brokerage firms are permitted to sell complex and risky private placement securities to these business owners. And many of these business owners actually have no understanding of the true nature of the securities.

Change Could Include Definition of Financial Sophistication 

The SEC is considering whether to incorporate into the accredited investor definition an investor’s financial sophistication, rather than solely their assets. While this would be a more subjective standard that could be more difficult to evaluate, it would provide greater protection for investors. Importantly, the number of years an investor has maintained a brokerage account should not be viewed as a variable in assessing one’s investment sophistication. An investor could maintain an account for 30 years, never performing their own investment research or analysis and always relying on an investment professional for investment advice. It could be unjust for such an investor to be labeled as sophisticated. Similarly, the fact that someone has not maintained an investment account for a number of years does not mean they have not received education or training on complex financial matters.

Some may argue that a subjective standard for an accredited investor that incorporates investment sophistication could be too time consuming or costly for brokerage firms to engage in. But we believe that the protection of investors should be foremost in the SEC’s consideration of a new accredited investor definition. The fact that it may be more time consuming or costly for brokerage firms to abide by the standard is something that should not prevail over investor protection.

Are You a Victim of Investment Fraud?

If you were a victim of investment fraud or stockbroker misconduct, contact a qualified investment fraud attorney today.

Call an Investment Fraud Attorney Today

If you are looking for an investment fraud attorney to review your rights and options, the investment fraud lawyers at Dimond Kaplan & Rothstein, P.A. have recovered more than $100 million from banks and brokerage firms for their wrongful actions.

With offices in Los AngelesNew YorkWest Palm Beach, Miami, and Detroit, our investment fraud attorneys represent clients nationwide and can help you recover your investment losses.

Contact an investment fraud attorney at Dimond Kaplan & Rothstein, P.A. today to schedule a FREE consultation to review your rights and options.

EN   ES   PT     

Miami Office
Grand Bay Plaza
2665 S. Bayshore Drive
Penthouse 2B
Miami, FL 33133
Telephone: 786.628.8236

Los Angeles Office
Available by Appointment
2029 Century Park East
Century Plaza Tower
Suite 400N
Los Angeles, CA 90067
Telephone: 424.544.7930

New York City Office
Available by Appointment
14 Wall St, 20th Floor
New York, NY 10005
Telephone: 917.382.5217

West Palm Beach Office
Northbridge Centre
515 N. Flagler Drive, Suite P-300
West Palm Beach, FL 33401
Telephone: 561.475.2887

Detroit Office
41000 Woodward Avenue,
Suite 350 East
Bloomfield Hills, Mi 48304
Telephone: 248.368.0182