Great writeup. Been thinking of doing the same thing.
> the unspoken secret is that accreditation — at least when investing in individual startups, and especially if the founder is a good friend of yours — is just a box you can check that nobody verifies
I've heard this as well, and it's a very sad thing, because it is one of those 'secrets' that if you knew, it'd open up a lot more opportunities for you. There are few 'secrets' separating the rich and poor, but this is unfortunately one of them.
Accepting money from friends is highly risky in my opinion.
A friend might say they are willing to lose 100% of their investment, but if you fail and the money is gone, there is likely to be negative effects on your friendship from both parties. Also if the financial state of your friend changes, like getting a mortgage or losing their job, they can get buyers remorse.
If you do make it big, then your friends might be annoyed they couldn’t invest (although if they are really twisted about it then perhaps they are not a great friend anyway).
Well, maybe. But if your net worth is < $2M and you want to build a portfolio of 20 or so startups and then let that play out for a decade until one or two have popped and the rest failed or languished, you are going to need steel balls.
The problem is variance. If 70% fail and only 10% produce meaningful returns, you want >>10 so you have a reasonable chance of getting average returns.
It's possible to get lucky with 5-10 startup investments but the common result is "lost everything" with "broke even" a close second.
The commenter you replied to above is half true. Accredited just means you can invest in securities not registered with the SEC, like your friend's bakery. Some funds are registered with the SEC, some are not. Some funds only accept accredited investors, some do not.
Anyone can sell stock to non-accredited investors... it's just that it costs much more to do so, so most don't. Instead, they go to the already rich upper-class and make them richer when the investments pan out.
One aspect that goes completely unmentioned in all this is the racial aspect. Many people want equality today, but the fact is that for many minorities, they are dependent on an upper class that is mostly white to raise their money. Instead of being able to issue stock directly to members of their own community (and people they likely have closer relationships with), they have to make a case to people they've never met and are not daddy's best friend. If we really want equality, it's time to end these restrictions.
its good you are aware of their work and on board with the research
you should recognize that's 6 years old and everything that was going to change has already changed, the article of this very thread is about using the new changes
> - Permit individuals who pass an accredited investor examination to qualify as accredited investors.
Only a further expansion this last point is what is on the table. As taking several FINRA tests do now allow for qualification as accredited (as seen in OP's article), and people get to submit new non-FINRA tests, their approval has not occurred yet.
The legal consequence isnt on you, its on the company selling shares. So just like the Texas law, it deputizes everyone else to shut out poor people instead of being a prohibition from the state directly on the poor person. In practice that means just never talking to poorer people about opportunities, and letting them figure out that they cant even raise capital because none of their friends are accredited. Just American things.
You act like startups are some "keep poor people down scheme". It is because startups are incredibly high risk, and they will most likely lose their money. "Poorer" people can't stand to lose 8/10 bets they place in most cases. Only in the past 10 years with bubble money, and bubble VC exits are Silicon Valley startups seems as 2/10 gold mines. Before that, they were few/far between with a lot of failures. Startups are a failure game.... because their default mode is "fail".
Also note, outside of SV - the rate is nowhere near 2/10 billion valuations.
Making sure an investor has financial acumen helps founders focus because it is hard enough raising money from angels/VC's in $10k+ amounts - imagine if you only raised $100-$1k per person. Egad! Crowdfunding might be an exception to this - but it is fairly new.
Someone I know retired from an executive role at a tech company and, in retirement, he got into doing a lot of angel investing. He mostly got out of it except for a few companies he especially believed in. He told me he would have done far better investing the money in a handful of large tech companies.
People think there are these high-return (after adjusting for risk) investment opportunities out there off limits to the plebes. And it's mostly not true. Sure you can get lucky. But over the past decade you could have made a lot of money on boring big company investments.
It doesn't require financial acumen to follow a lead that has qualified a deal. It is technically possible to form syndicates that corral millions of small checks (Blockchain) to follow leads. And while startups are risky, the investing discipline is simple: spread your bets among several "qualified deals", like poker. Anyone skeptical of this should download Fantasy Startup at Doriot.com which is working to qualify non-millionaires as SEC Accredited....you'll quickly discover that everyone can (and should) be investing in startups. All that needs to happen is, first, education, and second, scaled access. Scaled access will follow once there is a large and growing educated population of Mainstreet investors. The average age of the Accredited investor is close to 60 years old....while 98% of GenZ's and Millennials don't qualify. Does it really make sense to cockblock the generations that should be investing (given they have time and ability to take on risk) and they have to live with the investing decisions of today?
I've invested in several startups, as an employee exercising options, and also as an investor. Unless you have a lot of money to spread around, you're better off investing in the stock market.
I've invested in several private equity funds, and many times those funds negotiate things that are far more lucrative than equity, such as temporary or permanent revenue splits, convertible notes which may be partially paid off before converting into extremely large positions in the companies, you name it. In this structure, I realize from experience, that it is not possible to compare the fund's performance to the stock market, as every limited partner has their own unique exposure to investments that all perform differently.
I've seen the headlines that match what you said, the S&P returns more than picking various startups to invest in most of the time, and that many funds also mirror that, in reality I think all discussion about this is inaccurate, because there are additional variables to account for. Maybe actual equity will underperform just picking S&P equity. But so much more is actually happening which will never show up on a cap table or comparison of valuation growth or any mandated disclosure.
Top ones like to turn people away just for the headline that they turned someone valuable away, so they somewhat also rely on relationships and schmoozing to get in.
In reality though, so many people are all talk about their ability to actually move any money, that $1mm will get you in everywhere. You know the saying: money talks, bullshit walks.
Note: there are other regulatory gatekeeping tiers above accredited investor, but they are all self-certifications too which means you can just say you have $5mm or $10mm in net worth, etc.
> Making sure an investor has financial acumen helps founders focus because it is hard enough raising money from angels/VC's in $10k+ amounts - imagine if you only raised $100-$1k per person. Egad! Crowdfunding might be an exception to this - but it is fairly new.
That has zero to do with the existence of accredited investor rules.
In the current reality, many issuers have their own minimum investments such as $25k, $500k, $1mm. This successfully keeps out people that either don't have those sums of money or are encumbered by life expenses, far more than the accredited investor rules do.
An alternate reality without those rules also retains the ability for issuers to deny capital from whoever they want, and by soft-denying capital by setting minimum amounts.
I don't see this as some equity issue people are framing it as.
Issuers have the rules of $25k, $500k, etc bc they really don't want to deal with inexperienced investors (doctors, dentists, etc, etc).... who get fearful when they write a check, are inexperienced and so try to micromanage, and worry incessantly about exits and can be short sighted. Angels are great at hiding all of this, until after the deal closes.
It makes sense to heavily filter people like that out - it would be damn terrible as a founder to have to deal with 300 people who all invested "their life savings of $10k". If you haven't been involved in many private deals, you might not believe that. But most deals are small, rosey-eyed-until-a-loss-might-occur "angels".
I don't care about what the issuers do and I am completely fine with high buyins to filter people out. I want the government out of it completely, but a special purpose accreditation test is fine as I only have issue with the wealth tests and the tests that require a sponsor. (even the series 65 test requires "good standing" as the article mentioned, which is more than just passing the test recently).
People don't need permission to fail financially, they can walk over to any casino and do that. It is merely happenstance that its two different governments regulating casinos (state) versus these particular capital formation rules (federal). But the user experience for the individual doesn't factor that in, and there shouldn't be a discrepancy at all. The argument in favor of "protecting people that actually need their money by deputizing everyone else" is so thin and weak. As we know, these kinds of "deputize everyone else" regulations only exist because a direct prohibition from the state to the individual would undermine at least one of the individual's constitutional rights.
I don't think anyone specific is responsible for this exclusionary-by-class system, I do think there are some opportunists that perpetuate it, and for that just look at the discussions and comments over the accredited investor regulations hosted on the SEC servers.
People shouldn’t need to ask for permission to fail.
In case it isn't clear, I am not saying startup investing is a golden ticket, and my comment wasn't about startups at all, it was about all private equity and I’m not saying thats a golden ticket either.
Whether inadvertent or deliberate, an unnecessary class system exists which should not.
I've been looking at Kinesis Money as a potential investment and hedge. They have a KVT - Kinesis Velocity Token, which cannot be sold to investors in the US, unless they are accredited investors. There are other avenues to obtain one, but apparently they require verification if getting it directly from Kinesis.
> the unspoken secret is that accreditation — at least when investing in individual startups, and especially if the founder is a good friend of yours — is just a box you can check that nobody verifies
I've heard this as well, and it's a very sad thing, because it is one of those 'secrets' that if you knew, it'd open up a lot more opportunities for you. There are few 'secrets' separating the rich and poor, but this is unfortunately one of them.