I Like Accredited Investor Laws. Here's Why.

We Should Democratize VC, But Not Like That...

I’ve been in tech for almost 10 years. During that whole time, the idea of getting rid of accredited investor laws so anyone can invest in startups has been a hot topic and commonly debated in the realm of democratizing venture capital. Note, historically these laws prohibited anyone from investing in startups unless they were rich. See the below image for the qualifications, coming straight from the SEC.

The issue with this is how can the working class get the upside of the next Uber if 99% of people can’t even legally invest in startups? The idea is that the system is stacked against the common-folk, and only allows the rich to invest in these assets that create massive wealth. The rich get richer, the poor stay the same, or so it seems in this context. I think on a high level, this makes sense. Startups are a way plenty of people have created a massive amount of wealth, so it seems unfair to block off regular people from being exposed to this asset class.

The main argument for having these laws is mainly to protect investors from being scammed by bad actors in the system. For every one Uber, there is literally 1M Shmoobers. I could write a whole post on that, but for sake of good faith, let’s assume people reading this only plan on working with good actors w/ solid ethics. Even in that case, these laws have a purpose and should not be removed.

Personally, I Like The Laws. Here’s Three Reasons Why

People overestimate their future ability to grow wealth via startups

Sure, everyone thinks they know the startup that will blow up but it’s a lot more than just picking to win in this game. It’s picking, it’s access, and it’s ownership. In order to invest in startups, you need to be able to pick the ones you think will massively appreciate in value. Then once you pick, those founders need to be open and willing to give you a spot on their cap table. If you’re writing a very small check, this may be a tall order for a founder and potentially even a nuisance. Lastly, you need to have enough ownership in the startup to not be diluted into oblivion through several rounds of funding. What’s to stop the series A or B firm from wiping you out if the startup is successful down the line? Nothing. You won’t have much negotiation leverage either. This is an issue for investors who cut checks as large as $100k, so something in the low thousands could lead to an issue where your ownership slips to nearly 0%.

Is there a world where you can pick a great startup, get access to invest, invest at a valuation that gives you decent ownership, and pray that future investors play nice? Yes! It’s just far less likely than the average retail investor who wants to get into startups wants to admit.

You Actually Don’t Need To Be Rich To be Accredited Anymore

This is new, but as of a couple of years ago, there are more ways to become an accredited investor without needing to have $1M in assets or make $200k in salary for 2 years in a row.

The most important change is the idea that you can take a test and if you pass, you become accredited. If you pass the Series 7, 65, or 82, and are in good standing with FINRA, you are accredited. This is great! Anyone can study up and take these tests. Most importantly, there isn’t a minimal wealth level tied to taking it. I like this because it makes being accredited attainable for anyone. And anyone with high agency can just study, take it, get the deed done, and start cutting checks.

With the introduction of this new iteration of what makes someone accredited, it makes it easier to spot the people who are just being a little lazy. If you really wanted be accredited, you would just study and take the test. So by simply not acknowledging that the step is there and demanding the step be removed to reduce all friction, it could communicate to the SEC (and to founders) that you shouldn’t be accredited in the first place.

You Can Get Ownership Via Advisory Shares

If you’re in a position where you want to invest in startups and get that upside but are not accredited, consider working for startups in exchange for equity. This is a great way to build up your reputation and develop your access points to when you are in a position to start investing. Getting advisory shares also allows you to build your own skillset so you can be a better investor in the future for your portfolio companies. Startup land is a very opaque industry, so spending your time at a few can really amplify your learning and spike your growth curve in making it in this industry.

That’s it for me. I am all for democratizing VC. I have written nearly a dozen posts about it. I just don’t think that removing the accredited investor laws are the move. I think it’s harder to make money in startups than people think, its easier to become accredited without wealth, and there’s potentially more appropriate ways to cut your teeth in startups while still getting upside, like advising. I hope you find this post helpful for your own framing. Thanks for reading.