What does it mean to be a Sophisticated Investor?
A Sophisticated Investor is a high-net-worth individual who is legally eligible for advanced investment opportunities and benefits such as venture capital, hedge funds, private equity and investing in startups. Currently, to qualify as a sophisticated investor in Australia, one must either have 2.5 million dollars in net assets or must be earning over $250,000 for the last two consecutive years.
What are the incoming changes and why are they being introduced?
When the 2.5 million threshold was initially released in 2001, only 1.9% of the population were able to qualify as an angel investor. Since then, the percentage has increased to about 16% as of now. There are monetary restrictions in becoming a Sophisticated Investor because it is inherently assumed that if you possess a certain amount of wealth, you will also possess a higher level of financial knowledge and will be able to take on the risks posed by advanced investment opportunities. However, there have been several people who have met the threshold and have lost a considerable sum of money through these more advanced investing opportunities and have blamed the government for not regulating the system better. Hence, the government seeks to raise the threshold to 4.5 million dollars to protect investors in the long run by limiting access to becoming a sophisticated investor.
What are the problems with the incoming changes?
These incoming changes also introduce a new set of problems. One of the most notable outcomes of such a change would be that it further congregates these investment opportunities to a smaller population of wealthier individuals. Moreover, there would be a noticeable section of qualified sophisticated investors who would lose access to their present investment opportunities and may have to suffer from major losses as a result. Additionally, the start up scene would suffer tremendously from the loss of many potential angel investors as startups heavily rely on these investors for supporting their businesses.
Why does the incoming change not necessarily solve the problem?
The reason why many people are sceptical about the success from making such changes is because it conflates wealth and financial knowledge. These changes carry an inherent assumption that those who are wealthy will be more inclined to make smarter financial decisions, however, there are several cases of generational wealth where the individual might be wealthy but does not make good financial decisions. Ultimately, research suggests that the overhaul of the sophisticated investor scheme would be counterproductive to both the investors and the startup scene as it does not solve the inherent problem which is the lack of education.
What are the alternative ways to protect investors?
Many finance experts argue that a better approach to protecting sophisticated investors would be through education. Installing a compulsory course that individuals must undertake before becoming sophisticated investors could perhaps be a better approach to protecting investors rather than limiting access of advanced investment opportunities to the wealthier subsection of the population.
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