When Kim Kardashian appeared on CNBC hawking her line of cosmetics, she became the latest celebrity to try to turn her status into a viable business venture. From reality TV stars to professional athletes to entertainers, many have tried and failed to recreate themselves as entrepreneurs.

That’s because success in one field doesn’t guarantee success in another. So it goes for the world of high-net worth investing, where the government has attempted for more than 75 years to protect unsophisticated investors from making big mistakes without impeding access to innovative capital market investment products. The problem is, they can’t get it right. The issue originates with Rule 506/Regulation D, which creates a threshold at which investors are considered sophisticated. It’s a test of dollars, not of actual investing skills.

Other than the SEC, I think that most would agree with the old adage that, “The money doesn’t make the man” is especially true with for vetting advanced investment strategies.  And having $1 million in liquid assets (or $300,000 of income for two years) is a poor proxy for determining who should have access to these offerings.  In many cases, the top 1 percent so vilified by Occupy Wall Street could have inherited their money, or sold a manufacturing firm, built a family farming business or hundreds of other possible scenarios which would NOT create any sort of legitimate foundation of knowledge surrounding investments.  But the SEC’s Rule 506 attempts to do just that:  to equate money with knowledge.  When President Obama signed the JOBS Act into law in April, it gave the SEC a chance to review that dated threshold for expertise.  Instead, nothing happened to either effectuate a better method or protect consumers from an upcoming slew of “slick” ads’ which have little oversight.

In the past, intermediaries were charged with verifying the “status” of the accredited investor prior to accepting funds.  Now, this key task has been reassigned to the actual issuers instead.  The SEC ruling stopped short of steps which firms should use to verify instead simply stating to verify and document. 

So will following this regulation keep smart 99 percent of investors from ever becoming the 1 percent!  Just as there is no guarantee that wealthy individuals make savvy investors, there is likewise no basis for the belief or contention that just because someone doesn’t meet the arbitrary sophisticated investors standard held out by the SEC couldn’t benefit from access to hedge funds, private equity and other so-called sophisticated investment products. The Facebook IPO fiasco revealed what most of us have known for a long time – the wealth truly available in the capital markets from start up companies accretes to a few in-the-know investors who get in on the game way before the IPO hits the market. By the time the IPO happens, the money has all been made and Main Street investors – many of whom actually feel lucky to get in on the action – are left holding the bag.

That’s not fair to Main Street investors, who are already struggling to replenish their retirement accounts following the financial crisis. Even the ones who manage to save a good amount for retirement are hobbled by poor performance of available investing vehicles. While the investment products that are coming out of the shadows, including crowdfunding, hedge funds and private equity, aren’t guaranteed hits, they at least offer some alternative exposure for investors who are already behind the curve. But because of a lack of foresight by the SEC, the vast majority of investors in the United States won’t see any changes as a result of the JOBS Act. They’ll still be locked out of the market for innovative capital market products.

Beyond the question of fairness and whether the current standard and its proposed revision even works, there’s another important issue:  who assures that the wealth managers and financial advisors can understand increasingly complicated products?  Why is the process of becoming a potential investor more highly regulated than that of their advisor?

This old standard had the chance to be re-examined with the signing of the JOBS Act into law in April.  Essentially designed to infuse small business with capital and stimulate the economy by legitimizing crowdfunding, the JOBS Act had some unintended consequences on private vs public market investments. One of these outcome has been the ability for hedge funds and other formerly private investments of the wealthy/accredited to be more visible as they are allowed to generally advertisewhile still being disallowed from accepting investors who do not make the threshold (net worth of $1 million or income of over $200,000/$300,000 for joint spouses). 

Instead of re-imagining how best to separate “accredited” from unaccredited by issuing a relevant examination or something else, the SEC Commissioners have instead proposed new ways to enforce an old, out-of-date, irrelevant regulation equating “investing smarts” with income.

Backing up here, it’s not the investors who need to be protected from the issuers and not vice versa! Suffering from fraud, conflicts of interest that are reported in the mainstream press, and with no real standard to rely upon, individual investors are losing faith. One scandal after another – Bernie Madoff, anyone? -- has rocked the investing world amid the perception that the banks were bailed out during the financial crisis and the general investing public was left holding the bag.

The investment advisory business has operated for decades with a reputation that has exceeded the skill set of the average advisor. I am speaking of all advisors; from brokers to dually registered advisors/brokers, the independents as well as fee-only advisors — anyone offering investment advice to less knowledgeable consumers. Can/should the SEC regulate which investors see which products?  How can consumers be “protected” from making poor investments?  Should they?

If a standard could be created that actually measure the knowledge of an investor and ability to understand so-called sophisticated investments and the consequences of investing in them, it could potentially exclude some high net worth investors and include some less wealthy investors who are actually knowledgeable investors.  Let’s hope that this will be an eventual outcome to an out-of-date standard.

April J. Rudin is the CEO of TheRudinGroup <http://therudingroup.com/home> , a wealth marketing firm which creates campaigns and strategies for attracting and engaging UHNW/HNW clients for wealth managers, family offices, private banks, non-profits and others.  Specialized expertise in next gen wealthy, social media and digital messaging.