It seems like the rise of crowdfunding and ICOs may be having an affect on how US regulators perceive the investing landscape.
Recently, the SEC announced that they were exploring how to make it easier for individuals to invest in private companies, including some of the world’s hottest startups.
The initiative is being led by SEC chairman Jay Clayton, who is looking to boost access to the next Uber, Facebook and Airbnb while they’re still private. These companies all took private funding rounds up until their IPOs. Although IPOs offer the public access to companies’ shares, it is usually at a very high price relative to what early private investors paid for them, which means the returns are likely to be smaller.
The difference between those who get to invest in early stage private companies and everyone else usually comes down to their status as ‘accredited investors’.
As an investor, to be ‘accredited’ is to have special status under financial regulation laws. This special status grants you access to complex and higher-risk investments such as venture capital, hedge funds and angel investments.
In the United States, accredited investor rules dictate that you must have a net worth of at least $1,000,000, or earn an income of at least $200,000 each year for the last two years. The assumption of this status is that only people with large amounts of money should be afforded the privilege of investing in risky companies where their entire investment could drop to zero.
Although the goal is supposed to be to protect regular investors, this is actually the opposite case. During an extensive interview, Ethereum inventor Vitalik Buterin shared his honest thoughts on accredited investors:
“I personally am willing to publicly say that I find current accredited investor rules of many countries, which allow only millionaires to invest in securities, very unfair and plutocratic, and in some cases they can make things actually worse because they mean regular people can only buy in at higher prices and thus more easily become victims.”
Many who understand that the only way to make ‘real’ money as an investor is to ‘get in early’ and have expressed this sentiment.
Accredited Investors have the privilege of investing in stocks or tokens at a 50% discount, and can simply choose to sell their stake once the stocks or tokens go public and everyone else starts buying in. This creates a cycle whereby accredited investors don’t even have to recognize any long-term value in a company in order to profit. They simply have to get in early and rely on non-accredited investors to jump in later so they can profit off of them.
In the end, the regular investors whom the laws are supposed to protect end up getting hurt because by the time they have bought in, the price can only go down, as accredited investors begin to sell their stake.
Changing the Rules
This new initiative by the SEC is a positive sign that the US may be changing its view around what it means to be an accredited investor. As crypto influencer Chris Dunn stated;
“Accredited Investor” should mean someone that has KNOWLEDGE, not a $1M+ net worth. This is a step in the right direction! “The SEC hopes to create more “accredited” investors by allowing people who don’t meet wealth thresholds but have advanced education”
Education about business and the industry you’re investing in is far more important that the actual amount of capital you hold. The current model assumes that just because one has a lot of money, it means that they are knowledgeable about business or know how to make smart investment decisions. Rule changes by the SEC that draw more emphasis on education as opposed to net worth will have a positive impact on the overall quantity and quality of accredited investors. Furthermore, but creating an educational barrier to entry, one can easily overcome it by simply learning how to become a smarter investor through a variety of online or offline courses that will likely emerge once these rules have been put in place.
Non-accredited investors are responsible for the crypto revolution. Before big players were ever willing to put millions of dollars into bitcoin and other cryptocurrencies, everyday people with a few hundred or thousand dollars risked their capital based on their knowledge of cryptography and distributed systems. Despite not being millionaires, their education allowed them to see the potential in an unproven technology.
Ultimately, by the SEC opening the doors for regular people to invest in private companies, they are significantly widening the scope for world-changing innovations like cryptocurrencies to receive the financial support they need to reach their potential and achieve mainstream adoption.