Equity crowdfunding is still a very young industry in the U.S. It’s been live to the general public only since May 2016.
That’s when “Regulation Crowdfunding” (Reg CF) went into effect. For the first time, all investors had the chance to invest in private startup companies. Prior to this, only accredited investors were able to invest in these types of deals (with a few exceptions). The Securities and Exchange Commission (SEC) currently defines an accredited investor as someone who has made more than $200,000 per year for the last two years ($300,000 as a couple) or has a net worth of more than $1 million (excluding primary residence).
Reg CF was a big step. But there’s still more work to do.
One big remaining problem is that many of the best startup opportunities are still available only to accredited investors. AngelList, for example, is one of the premier startup investing portals. But the types of deals it does are available only to accredited investors. AngelList began offering online investing back in 2012, well before Reg CF went live in 2016.
Our friends at SeedInvest, a leading portal offering both accredited and nonaccredited equity crowdfunding deals, are pushing for a change in the definition of accredited investor. This change would hopefully allow anyone to qualify as an accredited investor if they wanted to.
Here’s SeedInvest’s argument on why this outdated and arbitrary rule needs to be changed:
Accredited investors have significantly more choice when it comes to the types of investments they can make, which makes a number of asset classes inaccessible to unaccredited investors. These alternative asset classes, such as early-stage, privately-held companies, are typically those that have historically created a great deal of wealth. In restricting access to these types of investments, it potentially cuts off the vast majority of Americans from economic opportunity, which exacerbates the United States’ growing wealth disparity. Amending this outdated definition has the power to provide sophisticated Main Street investors with equal access to the same Regulation D opportunities as “professional investors.”
SeedInvest proposes a few different ways to expand the definition of accredited investor. The one I think makes the most sense, by far, is the testing method.
Here’s how SeedInvest describes it.
Passing an Exam – You’re tested on the rules of the road before getting a driver’s license, so why not introduce a test to demonstrate an understanding of the investment risks?
This makes perfect sense to me. Anyone willing to put in the time to study and take a test should understand the risks involved in early-stage investing. It could be similar to options trading, where you have to prove your knowledge and acknowledge the risk to be approved for complex trading.
SeedInvest has posted a petition on Change.org asking the SEC to update the definition of accredited investor. If you believe everyone should have equal access to startup investment opportunities, take a minute and sign it.
Have a great weekend, everyone!