Accredited Investors, Tread Lightly
Before taking the plunge, measure whether the rewards of access to complex private investments outweigh the risks.
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if you meet some straightforward income or net worth requirements, you can qualify as an “accredited” investor and gain access to a vast universe of complex private investments. But do the rewards of that access outweigh its risks?
That question is being hotly debated amid potential changes to the accredited-investor definition. The Securities and Exchange Commission is studying the possibility of expanding the definition, giving more investors access to hedge funds, private equity and other private offerings. But some academics and investor advocates say that the definition should instead be narrowed to protect small investors from the risks of such offerings, which can include poor disclosure and high fees.
The issue is particularly important to older investors, whose sizable retirement accounts often qualify them as accredited investors. Those who seize the opportunity to invest in private offerings may benefit from the diversification and higher yields that can come with such investments—or they may be sold pricey holdings that are tough to understand and even tougher to sell.

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Currently, you can qualify as an accredited investor if your income exceeded $200,000 in each of the past two years (or $300,000 jointly with your spouse), and you expect it to reach that threshold in the current year, or if your net worth exceeds $1 million, excluding the value of your primary residence. About 16 million households, or 13% of total U.S. households, qualify as accredited investors, according to the SEC.
The theory behind the accredited-investor definition, as laid out in securities laws, is that it limits private-offering access to investors who are sophisticated enough to “fend for themselves” in the absence of strict regulation and have the financial wherewithal to withstand significant losses.
But many accredited investors are “retirees and pre-retirees—people who are really not in a good position to take risks with their money in the vast majority of cases,” says Barbara Roper, director of investor protection at the Consumer Federation of America. “A person who is 65 and has $1 million they need to make last over 25 or 30 more years should not be gambling on their investments.”
Revising the Definition
In 2019, the SEC asked for public comment on several potential changes to the accredited-investor definition, such as allowing individuals with a certain minimum amount of investments or certain professional credentials to qualify. The SEC also raised the possibility of expanding the definition to include any investor who is advised by a registered financial professional.
Some industry groups applauded the idea of expanding the accredited-investor definition. The current thresholds “exclude sophisticated and otherwise qualified investors from pursuing opportunities currently available only to accredited investors,” the Institute for Portfolio Alternatives wrote in a letter to the SEC.
But others raised alarms about the implications for older investors. The cognitive decline that can come with advanced age “can affect the ability to evaluate complex financial securities,” wrote Michael Finke, professor of economic security at The American College of Financial Services.
In recent research, Finke found that accredited investors age 80 and older are more than 80% less likely than unaccredited investors age 60-64 to have high financial literacy scores—suggesting that older investors may easily meet the accredited-investor definition without having the ability to “fend for themselves” in a largely unregulated market. Older investors with significant assets and waning financial sophistication may be attractive targets for brokers peddling complex investments, the study notes.
Finke’s suggestion: “the SEC should consider exempting investors over age 80 from accredited-investor eligibility,” he wrote, unless they’re working with a financial adviser who acts as a fiduciary—in other words, one who is obligated to act in clients’ best interests. Investors “may be perfectly capable of understanding these securities when they’re 80, but if they’ll continue to invest in them into their 90s, they need a professional who can help them navigate these waters,” Finke said in an interview.
State securities regulators suggested other changes meant to better align the accredited-investor definition with investor sophistication and risk tolerance. The SEC should raise the income and net worth thresholds and consider additional criteria such as the amount of investments owned, the North American Securities Administrators Association wrote.
No matter how the accredited-investor definition evolves, older investors should approach unregistered investments with extreme caution. If you’re pitched private offerings, “ask yourself why these firms are not able to get capital through traditional means,” Finke says. “If this isn’t a market that you fully understand, you’re more likely to be a victim than a success.”
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