Wealth begets wealth: Are retail investors at a disadvantage?

To invest in risky early-stage private ventures, the Government must consider you to be a ‘sophisticated investor’ that is:

1. Earning an income of over $250,000 per annum in the previous two years or

2. Having net assets in excess of $2.5 million. This means that only a small fraction of the population are able to invest in these businesses.

Not only does that provide a large amount of leverage to this small group of investors, but it also impedes new businesses that are emerging and require start-up capital.

Interestingly, this is where the Government draws a line. Retail investors are still able to invest large amounts of money to risky ventures that enter through public IPO, these tend to underperform heavily and lose many retail investors money. The huge returns to be made through investment into early-stage private ventures cannot be consistently seen in the ASX. This means that the majority of retail investors are restricted to small consistent gains or losses on the ASX.

Crowd-sourced equity funding provides one solution to this, but what if a retail investor (even someone who is earning an income of $245,000 with $2.4 million dollars in assets) wants to invest in an early-stage start-up? The Government’s position on this patronises many educated and savvy investors who simply don’t meet either of those requirements.

It would be interesting to see what the Government’s angle is on this. Are “sophisticated” investors simply those that have more knowledge about the stock market as they are wealthy already? Or do they simply have the ability to take on more risk, and everybody under $250,000 in annual income or with less than $2.5 million dollars in net assets unable to do so. Well for one, it can’t be a statement about knowledge.

Even the average finance professor at an Australian University would earn less than $250,000 and you’d expect them to have at least a basic understanding of risk and shares? If it is about wealth, it seems like a very arbitrary number. The average net-worth of an Australian household in 13-14 was $809,000, meaning that a very small proportion of people would have the requisite $2.5 million dollars worth of net assets. Much of this wealth could be inherited too, and a rich gullible investor will still face the same risks of losing much of their wealth as a poor gullible investor.

I believe that the Government needs to develop a better position on who is allowed to invest in companies. The current position is patronising to retail investors, and frankly the vast majority of Australia’s population. The Government allows us to punt, gamble, and invest in risky property assets, why is the line drawn at private businesses? Something that produces a real and meaningful asset to the Australian economy, and employs our population?