Deciding Who's Rich (or Smart) Enough for High-Risk Investments Yasho Lahiri, a partner at law firm Baker Botts in New York, said investors would be better protected with more disclosures, not by their degree of wealth. But it has broader implications. Should the United States government be deciding what people can do with their money? And how do you define who is wealthy enough - and smart enough - to invest in these offerings? We're talking about private placements - a term the financial industry uses for anything from real estate deals to hedge funds to last year's much-talked-about offering in Facebook shares. What all these investments have in common is that they can be sold with fewer disclosures than public offerings. They also often carry cachet, and those who get into them can end up with large returns. That may seem unfair to anyone excluded because of a lack of wealth. But these private investments can go to zero just as easily as they can climb into the stratosphere, which is why investors who cannot afford to lose a lot of money are barred. Since 1982, specific dollar amounts have been used to define who is an "accredited investor," the S.E.C."s term for someone deemed sophisticated enough to invest in these nonpublic deals. The two most commonly used measures are annual income - over $200,000 for an individual or $300,000 for a couple - and net worth, which was $1 million. In late December, the S.E.C. redefined how people should calculate their net worth. Per the requirements of Dodd-Frank, the commission removed the equity in a person's primary residence from consideration. But if the value of that house is less than the mortgage, that liability needs to be included. "It's an interesting question as to why this qualifies someone as sophisticated," said Robert E. Buckholz Jr., a partner at Sullivan & Cromwell. The income and the net worth requirements are a proxy for the ability to fend for yourself. But also in compliance with Dodd-Frank, the S.E.C. will spend the next three years determining whether to make further changes in the accredited investor requirements. While it is hard to say what the review will produce, it is worthwhile to look at how wealth and financial expertise have been confused. WHAT THE RULE DOES In a 2009 article in The Washington University Law Review, Wallis K. Finger, now an associate at Schulte Roth & Zabel, used humor to lay out the problem of using money as a proxy for sophistication. "Paris Hilton almost certainly can purchase unregulated securities issued by hedge funds or other private investment vehicles," Ms. Finger wrote. Although her training and sophistication in the field of high-stakes financial transactions may be limited, the Securities and Exchange Commission would leave her to her own devices if she chose to invest in private offerings. For comparison, she created a woman named Sheryl who has both a master's degree in business from Harvard and a doctorate in financial systems analysis. "After all of this schooling, Sheryl is long on debt and short on assets," Ms. Finger wrote. She has several offers to work at the nation's most prestigious investment brokerages. But if Sheryl wants to invest in a private offering, the S.E.C. regulations will not allow it. In other words, using money as a stand-in for financial sophistication is a fairly unsophisticated solution. When news leaked out last year that Goldman Sachs was planning to offer private shares in Facebook to its wealthiest clients, there was outrage from people who were excluded. After much media attention, the firm limited the private offering to overseas clients to be sure it complied with S.E.C. regulations. Anyone will be able to buy shares in the initial public offering of Facebook. In reality, most private offerings are far less glamorous and carry significant risks. Barbara Black, a professor and director of the corporate law center at the University of Cincinnati College of Law, said she was more concerned about small offerings, like a local real estate partnership, where an entrepreneur tries to raise money by promising outsize returns to investors in the community. "It may be perfectly fine, but the nature of things is that these are risky," Ms. Black said. You see litigation involving people who are wealthy, but you don't think of them as super-rich - doctors, dentists, lawyers, some accountants. Are these really sophisticated investors? The accredited investor regulation is by design paternalistic, but its arbitrariness is what bothers people. Originally, the Securities Act of 1933 aimed to provide more information on securities to prevent investors from being manipulated. Those who were exempted from these requirements were believed to possess enough knowledge to make informed choices. Using the example of doctors and lawyers investing in a local real estate deal, Yasho Lahiri, a partner at law firm Baker Botts in New York, said investors would be better protected with more disclosures, not by their degree of wealth.