Can all investors become “accredited”?
Up until last Wednesday, the only people who could invest in private capital investments were “the rich”.
In order for one to be considered “accredited”, one had to have a net wealth of $1MM.
That wealth was excluding one’s home, naturally, so taking a second mortgage to invest was a no-go.
But the SEC had decided something marvellous last Wednesday: allow knowledgeable people to invest in startups.
Some would consider this problematic, as this may hurt the prestige of such investors.
But let’s consider this for a hot-second: would a startup mind who brings the money?
There is a saying in the startup world, where money invested should bring five-tenfold of its original investment.
This kind of investment is based on the fact that the money invested was “smart”.
What is smart money though?
Smart money is money invested by someone who understands the industry and could take the startup forward.
A person who has done enough due diligence to consider the investment “eligible” for his/her money.
Since accredited investors back in the day could only be rich, it usually meant a person who led a similar business in an executive position.
Or, it could be someone who has deep pockets and enough influence to bring over savvy people on board.
Whichever the case is, the point was to take someone like this onboard.
The “new” smart
Can all investors become “accredited”?
According to the SEC, a person who wishes to become a private capital investor does not need to be rich anymore.
It’s enough that this person is “savvy” in terms of understanding the risk, for it to be considered aces in the SEC’s book.
It means that a startup could potentially take on an investor who has some money in the bank but is not rich.
That person may be completely immersed in the project, since the lack of funds may lead to even more “skin in the game”.
But would startups go for this option?
But why now?
The world is changing, mostly because of Covid19.
Startups are everywhere, and may need growth money.
In some regions, the sum of money needed is much smaller in comparison with the US.
As such, an accredited investor in those areas doesn’t need that much money to invest.
$50,000 would be considered the equivalent of $200,000-$250,000 in the US.
So why would anyone not find this lucrative?
Valuations would be high with a lot less money, it’s an investor’s heaven (to some degree).
What has facilitated the change
One way for non-accredited investors to be able to invest in startups was to come as a type of angel-network.
That angel-network pooled in money from different individuals, where their combined wealth was considered “fine” in the SEC’s eyes.
With this amendment, there is no minimum anymore.
Anyone who understands the risk and has some money to spare, could potentially invest it in private markets.
This might also be a way for the SEC to douse down the craze of crowdfunding, where the platforms served as “accredited investors”.
Crowdfunding, in essence, is the same thing as “going public”:
A company offers shares to the public, which in turn buys the shares and invests the money straight into the company.
With crowdfunding “out of the way”, investors can now become “accredited” like everyone else without being rich.
It is not yet known if they could receive a tax deduction on their investment, like other investors.
What are the risks?
The main risk is actually for the SEC.
Another risk is for accredited investors.
They would now lose their main bargaining chip and would give the power back to the startups.
There could also be the risk of someone being savvy on the one hand, but unable to cope with the loss of that money in a certain startup.
If there are no more capital-barriers, what would stop future bankruptcy if a startup goes under and unable to pay back?
The silver lining
Some would say that the SEC had gone mad; getting rid of crowdfunding platforms so people would no longer have a choice?
It also breaks the cycle.
If an investor doesn’t need to be rich anymore, then it makes the SEC seem more “human”.
It’s not just “about the money” anymore.
But still, the SEC and the stock exchange as a whole may lose credibility, no?
Startups may now shy away from the stock exchange.
But it’s not entirely true.
An IPO is still sought by many startups who want to become “legit”; it also offers their original investors their money back and then some, even if the company was never able to actually give that money back.