One of the fantasies about the United States is that it is the “land of opportunity”, where anybody with a good idea and willingness to work hard can bring a new product or service to market and profit if it succeeds. In fact, in order to do this, one must negotiate a maze of complexity and minefield of potential calamities, all of which are prone to change every time the legislature comes up with another pointy-head idea.
One of the most pernicious of these “for your own good” concepts is what is called the “accredited investor” requirement (which was called “qualified investor” when I first ran into it in the 1980s). This is a definition created by the U.S. Securities and Exchange Commission (SEC) which can be summarised by the phrase “Only the rich can try to get rich”. Here’s how it works. While anybody with the cash can buy stock in companies which have registered with the SEC and listed on public markets, the stock of private, unregistered companies (which includes every single start-up, since it takes years of growth to be able to afford a public stock offering and the attendant overhead and regulatory burden) can be sold only to “accredited investors” as defined by the SEC.
And who is an “accredited investor”? There are a lot of details, but basically, we’re talking about “the rich”. The current rules for a “natural person” (human being, as opposed to a trust, fund, etc.) are:
- earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent ) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence)
They also accept those who hold a variety of SEC licenses, which means “you’re already in the game”.
Now, Bloomberg Law reports “SEC ‘Accredited Investor’ Definition Tweak Faces Equity Concerns”.
The SEC’s plan to reconsider who is eligible to invest in startups’ privately-held share offerings is stirring questions about equity and diversity.
The Securities and Exchange Commission has considered the issue in the past, but only to make modest tweaks. The agency is expected to pick it up again in April with a request for public comment on changing the definition of accredited investors who can participate in privately held, “unregistered” share offerings of at least $10 million, according to the agency’s fall 2021 regulatory agenda.
Since when has increasing the financial requirement for an investor to buy stock in whatever he or she wishes by a factor of ten been considered a “tweak”. While a bit more than 10% of U.S. households having net worth over US$ 1 million (with many of them in areas where real estate prices have boomed over the last 20 years, and note that the SEC requirement excludes the valuation of primary residence, which disqualifies them), less than 1% meet the US$ 10 million threshold. So, unless you’re already in the 1%, you’re not “accredited” to risk your money in a start-up. Or, in brief, the first step in making a fortune by investing in a start-up is to first be rich enough that you don’t need the money you might hope to make.
This disgusted me sufficiently back in the 1980s when at Autodesk we had to keep inventing arcane schemes (some which which basically came down to ignoring the rules) in order to reward the people who were doing the work with stock in the company that I wrote in The Autodesk File:
Since people who joined the company in the beginning and worked themselves to exhaustion to build it to the point that venture capitalists were interested in investing were not ipso facto “qualified” to risk their savings by investing in their own company since they were not already wealthy. This is an example of what was referred to in the 1980’s as the “opportunity society”.
This may seem an obscure bit of financial arcana, but it’s a peek into the evil which pervades the U.S. regulatory state. Many people in that country have come to believe that “the system is rigged, and only the rich can get richer”. When it comes to the SEC and the “accredited investor” rule, these people are absolutely right, and it may soon get ten times worse.