An advisory committee for the Securities and Exchange Commission now wants to expand the pool of “accredited” investors to allow more people to get into high risk private investments. It’s a move that could help Wall Street banks boost profits at the expense of investors.

Wealthy investors become accredited when they meet certain qualifications under SEC rules. An individual qualifies as “accredited” if he or she earned more than $200,000 annually for the past two years or had a personal net worth of more than $1 million.

Investment fraud attorneys know that allowing more investors to put money into such deals, often the riskiest Wall Street has to offer, is a terrible idea. The reality, unfortunately, is that many private investments go bust and investors are left holding the bag.

Such deals, commonly known as Reg D private placements because of the regulations under which they are created, also have incredibly high fees and commissions. Brokers selling Reg D deals often have little understanding of how the funds work.

Private investments usually fund start-up companies who, at some point, wish to go public in an IPO. Many Silicon Valley investors have reaped huge profits by early investing in private placements.

But the higher the potential reward, the greater the risk.

Indeed, three such Reg D private placements – Medical Capital, Provident and DBSI – widely sold a decade ago by many small regional brokerage firms to Mom and Pop clients turned out to be Ponzi schemes, wiping out billions of dollars of investor equity and destroying dozens of brokerage houses that sold the investments. Imagine the sheer carnage if even more so-called accredited investors had been allowed to invest in such Ponzi schemes.

Private placements are a huge and growing marketplace. Brokerage firms sold $1 trillion worth of such offerings in 2013.

The justification for expanding as opposed to contracting the pool of accredited investors purportedly is to allow more investors to invest in emerging businesses.

In 2012 Congress passed the Jumpstart Our Business Startups Act – or JOBS Act – which allows “accredited” investors to be pitched private placement investments without much financial disclosure, exposing investors to a host of investment fraud connivances.

Last year, FINRA warned investors about the risks of private placement investments. The FINRA report cautions that investing in private placements or in an offering of a new company’s securities which is not registered with the SEC is “risky and can tie up your money for a long time”.

In the end, regardless of any changes in rules, investors need to beware of jumping into private investments which rarely work out and often result in dashed dreams and lost retirement savings.

Regular readers of this blog know that much of its focus is informing and educating Mom and Pop investors. They may be wondering why this week’s blog examines changing rules that affect wealthy people. Well, during and after the 2008 stock market crash, it became apparent that unscrupulous brokers were playing fast and loose with the standards for accredited investors and selling loads of such high risk private investments to retail clients, regular working people, who did not understand the risks. Many of those people were wiped out. It was tragic.

Many private investments are simply garbage investments being hyped by unscrupulous brokers. Once the Reg D deal blows up, many of those firms go out of business, leaving investors no place to seek recovery. The push to make it easier for brokers to sell such high risk investments is a bad idea and well worth watching. Stay tuned.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.