Accreditation test - good or bad?

Happy Friday friends!

In case you missed it, there’s potential for a big change soon around investor accreditation. Among other things, the **Equal Opportunity for All Investors Act of 2025 **aims to allow investors to become accredited through a test. This change has already passed the House, meaning it now needs Senate and Executive branch approval.

The question I’d like to address today is a somewhat controversial one - is broadening the accreditation mandate actually a net positive outcome? This means you have to reserve your opinions until you read my entire article (by extension this also means that if nobody gets to the end there will be no opinions 😉).

There are numerous ways of becoming an accredited investor today, but the most common paths for individuals are:

• Annual income of at least $200,000 individually or $300,000 jointly for the past two years, with an expectation of similar income this year

• Net worth over $1 million excluding the primary residence

This means that any individual (with some exceptions such as having professional licenses that give you exceptions) that doesn’t meet the two criteria above cannot currently invest in broadly marketed investments (also called 506c).

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That, of course, is now subject to change per the accreditation reform for LPs. If the bill passes, those who do not currently pass the accreditation test will be able to “test in.”

Let’s dive into the main benefits and drawbacks that I see.

The 5 benefits of this legislation that I can think of:

• **Freedom - **this is a broader topic and perhaps an article itself, but the relative argument here is “if someone can drop their entire retirement into a fake crypto coin (there’s another name for them but I’ll spare you) and lose all their money in seconds why can’t the same person invest in alternative investments”

• If you enjoy the intersection of my writing, alternative investments, and rants feel free to read more on this topic here

• **Merit-based inclusion - **smart, experienced individuals without high income or net worth could now participate - giving them a fairer chance to invest alongside incumbent LPs

• **Improved financial literacy - **the test will definitely encourage people to learn key concepts like liquidity risk, capital stacks, and promote structures - helping raise the baseline understanding of the average investor

• **More capital in the market - **a larger pool of accredited investors means sponsors can close raises faster and potentially pursue more projects - creating more opportunities for LPs to co-invest

• The big question here, of course, is whether that additional deal flow will be good or bad for the investor

• **Regulatory modernization - **the proposed test reflects the reality that many people already invest in complex public assets like options and crypto (more on the below) - yet are blocked from private placements

Now let’s get to the top challenges that I see:

context within the shared link - I couldn’t resist since we’re in the cons section :) https://youtube.com/shorts/jEBnrzNuUSA?si=t9LUkFt7nrhAmk4_

• Test design - this is a huge one … who writes the test and how broad/deep can such a test practically be? How often is it updated? How is identity verified? I think this test would need to walk a fine line between access and rigor and that’s truly a difficult balance to strike because the alternatives space is both extremely broad and complex.

• False sense of security - “I passed the test, so I’m an experienced investor and know what I’m doing.” Education is important, deal flow and practice is equally important, but an ego can counteract both of these to an unhealthy (and somewhat dangerous) balance.

• **Downside risk imbalance - **the original income/net worth thresholds weren’t just about wealth in my opinion. They were proxies for risk-bearing capacity and I write more on allocations to alts here. A current accredited investor might lose money but they can (somewhat) afford to lose it - this isn’t necessarily true with someone who’ll pass this test.

• **Pressure by GPs - **some sponsors may encourage investors to "pass the test" purely to qualify, then market risky deals to them. I already see this coming.

It’s important to note that I’ve said many times that while the current accreditation standard helps with liquidity and risk constraints, it does nothing in terms of preparing an LP to invest. So although I think the pending test legislation is a step in the right direction, it’s questionable in my mind whether this is a net positive from the perspective of risk and wealth building for the respective LPs who’d take it.

As always, I hope this was helpful and I look forward to your feedback!

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