Do you have a net worth of $1 million?
Some of you probably do and some of you probably don’t, but I bet that most if not all of you think you are sophisticated enough to invest in startups. Unfortunately for those of you who don’t meet that standard or any of the other accredited investor exemptions promulgated by the Securities Act, most startups won’t take your money. This post is not about whether startups should take money from non-accreds as there are ample posts on that, see here, here and here. This post is about what the “accredited investor” standard should be. As it stands approximately 8.5% of the US population is estimated to be accredited. Recently congress thought about raising the bar which would have resulted in just over 1% of the population meeting that standard. Luckily they got wise and took that provision out. I, for one, think we should expand the definition. That being said, I agree with the public policy behind the existing legislation: we don’t want people putting money in illiquid securities who might need that money (ever) and it is easiest to determine who can take the risk using a bright line test. So what might an expanded definition look like? I would suggest exempting family members who often invest anyways and intimately know the individual actors and holders of certain professional degrees or accreditation (i.e. JDs, CPAs, CFAs) who understand the risks. If companies like SecondMarket are successful in creating liquidity for private company stock, it would strengthen the argument to expand the definition, and any expansion would greatly help the startup ecosystem.
