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Let the SEC know that you agree—the definition of an accredited investor needs an update


A Wharton MBA student and the star of your favorite BRAVO reality TV show each want to invest in a promising new tech startup. Which person do you think has a better understanding of the inherent risks associated with this investment? If you went with the business school student, we’d be inclined to agree with you, however current securities laws do not necessarily align with this conclusion.

The current state of securities exemptions

Regulation D, a securities regulation that allows capital to be raised through the sale of equity or debt securities, is vital to the founders of many privately held, early-stage companies. Other crowdfunding exemptions, such as Regulation A or CF, require a company to undergo additional, burdensome steps while limiting the amount of money that can be raised. Such restrictions make Regulation D all the more appealing–not only is it cheaper and quicker, but it also does not limit the potential amount that can be raised. (For a more detailed breakdown of each offering exemption, please review our Academy).

However, by only allowing accredited investors to participate, Regulation D is only open to those who meet a certain wealth or income threshold. We at SeedInvest are concerned about the long-term viability of this wealth-based accredited investor definition, and its broader impact on the future of not only equity crowdfunding, but also other alternative asset classes, such as real-estate and private equity. In order to share our concerns and offer potential solutions, we have submitted a comment letter to the US Securities & Exchange Commission (SEC) intended to build on and reinforce a previous letter submitted five years ago addressing these same issues.

Show your support for the proposed updates by signing our Change.org petition to the SEC now.

The current definition

So what exactly is the current definition of an accredited investor? It states that an accredited investor, when it comes to individuals investing on their own behalf, includes anyone who:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse) 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 (excluding the value of their primary residence).

Why is this definition so important?

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.[1] 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.”

As we briefly mentioned above, many founders of early-stage companies turn to Regulation D over other offerings exemptions, such as Regulation Crowdfunding, as they come with limitations, such as additional regulatory requirements and costs. These newer startups are often the very same that go on to revolutionize a myriad of industries and develop life-changing technologies, which in turn creates jobs, provided they have access to capital early on. While there is no shortage of capital for so-called unicorns (late-stage, billion-dollar companies), early-stage companies struggle to obtain the vital funding required to get off the ground. This is all the more reason to update the definition, so as to widen the potential investor base for founders raising through Regulation D, easing access to the capital they so desperately need.

The definition’s history

The definition of an accredited investor that we use today was actually drafted almost 40 years ago, in 1982, the same year that Michael Jackson released Thriller and the compact disk (CD) was invented. Unsurprisingly, a lot of things have changed since then–not least the broad adoption of the Internet. At the time, very little information was publicly available or easily accessible to individuals considering investments in private companies. Today, investors have a vast amount of information available at their fingertips that they did not back in 1982. Those interested in investing in a startup can more easily conduct their own due diligence on the company and its team by searching Google for company reviews in online message boards and news articles, finding the team’s LinkedIn profiles, and conducting online background checks. A company’s market dynamics and the competitive landscape can also more easily be researched online, for free. On SeedInvest, investors are able to perform due diligence collectively, communicating with each other and directly with a company’s team through online message boards. Technological advances have significantly leveled the playing field over the past 37 years and need to be taken into account when reimagining the accredited investor rule.

Issues and concerns

Imagine the Wharton business school student we mentioned before. She is on her way to receiving an advanced degree from one of the top universities in the country. Perhaps this student has also already worked in finance for several years prior to her MBA or even has an additional professional certification, such as the CFA. However, because she was in school and did not earn more than $200,000 annually for the past two years, she doesn’t qualify as an accredited investor. Now, imagine the successful reality TV star we mentioned earlier. He may have dropped out of high school but qualifies under the accredited investor definition because his net worth is in the millions. Current securities laws are in place to ensure all participating investors are financially sophisticated and able to fend for themselves. Which of these people would you say is financially sophisticated enough to understand the inherent risks of startup investing, and is equipped to make an informed investment in an early-stage company? We cannot assume that wealth is an indicator of greater understanding.

The current rule also ignores the fact that significant cost of living (and respective income/wealth) discrepancies exist across the US. This seemingly arbitrary figure of $200,000 means very different things to a financially knowledgeable small business owner living in New York, where the median family income in 2017 was $80,114 annually, compared to an equally knowledgeable business owner in Buffalo County, South Dakota where the median income was $30,500 in the same period. This rule disproportionately excludes people, particularly those in lower cost of living areas, depending on where they live. If this seems unfair to you–that’s because it is! If we stand any chance of eliminating the growing regional wealth disparity in the US, then people in the same financial condition should be entitled to the same investment opportunities via democratizing access to potential high-yield startup investments.

What are some possible solutions?

We’ve established that the accredited investor rule needs updating. After all, individuals who qualify under the current financial threshold may have simply acquired wealth through inheritance or by winning the lottery. Yet the question remains, how can we rectify this? We think the following groups of people can realistically “fend for themselves”, and should be taken into account:

  • Passing an ExamYou’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?
  • Advance DegreedSuch as our Wharton student with an advanced degree in a business or law-related field (i.e. MBA, J.D., Masters or PhD in Finance, Economics, Business)
  • Professional DesignationsThose with additional professional qualifications (i.e. J.D., CPA, CFA)
  • Securities LicensesIndividuals who hold Securities Licenses, charged with protecting other members of the public, but ironically not deemed able to protect themselves (Series 7, Series 63, Series 24, Series 79, Series 82, SIE, etc.)

Supplementing the current financial threshold with an additional test of sophistication, or factoring a person’s experience, knowledge and credentials into whether they need protection from the government is far more likely to indicate financial sophistication than a blanket financial threshold.

What would changing the definition do for investors and Americans at large?

SeedInvest has outlined some much-needed changes to the definition as it stands today. If these proposed changes are enacted, the impact would be momentous on many levels:

  • Increase the capital available to early/seed-stage startups.
    What does a revolutionary seed-stage robotics company and a life-changing health tech startup have in common? They both need financial backing early on to help make their vision a reality. It’s critical that we make capital easier to access for early-stage companies.
  • Enable Main Street investors to access to the same opportunities as ‘professional investors’.
    Access to potentially more attractive Regulation D offerings, like the aforementioned health tech or robotics startup, for Main Street investors benefits entrepreneurs and investors alike.
  • Open up investing to financially literate people who don’t meet the current financial threshold.
    Wharton business school graduates earning less than $200,000 a year would have the same access to investments as minimally-educated, but wealthy, reality TV stars.
  • Treat people across the country equally.
    Taking into account the discrepancies in cost of living across the US means those in equivalent financial conditions have equal opportunity to invest in startups, irrespective of their regional income.

Show your support

Entrepreneurs and investors have a shared interest in amending outdated regulations such as the accredited investor definition. As long as Main Street investors remain excluded from investing in asset classes such as venture capital and private equity, the wealthy will just keep getting wealthier.

Let the SEC know you support these changes by signing SeedInvest’s Change.org petition


[1] Past performance is no guarantee of future results, and there can be no assurance that an investment strategy will be successful or that the historical performance of an investment, portfolio or asset class will have a direct correlation with its future performance. In addition, alternative assets and early-stage startup investing have a higher rate of failure, volatility, and less liquidity. Only those prepared for extreme volatility, a lack of liquidity, and the risk of losing their entire investment should invest in alternative asset classes. Furthermore, this content is for information purposes only. Nothing contained herein should be construed as investment, legal, tax or other advice, or an offer to buy or sell securities, nor should it be relied on when making an investment or other decision.


This post was written by SeedInvest on October 4, 2019

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