Just because an investor can throw $150,000 at an investment doesn’t mean they’re sophisticated and don’t need to look at a prospectus.
Increasingly, regulators understand that. Case in point: the Canadian Securities Administrators is reviewing prospectus exemptions available to “accredited investors” as well as the $150,000 minimum investment amounts that are often employed by small-and medium-sized companies for raising capital. Investors who can pony up that much cash are deemed “sophisticated” by current rules.
The CSA can recommend retaining the current exemptions, amending them, or repealing them. Two facts triggered this review:
- A large investment doesn’t assure investor sophistication; it only indicates the investor has a lot of cash or credit and potentially the ability to withstand a financial loss.
- The $150,000 threshold hasn’t been adjusted for inflation (if it were, it would have topped $265,000 in 2011).
It’s dawning on regulators and other market participants that a high investable asset threshold doesn’t, on its own, indicate any level of financial knowledge. And, without a thorough suitability assessment, there’s no proof an investor is equipped, either financially or mentally, or both, to sustain loss.