Why are there accredited investors

I’ve been meaning to write a post about accredited investors for some time now, and a random Quora question just got most of my fury.

Here’s the steak:

Actually, the Securities Act of 1933 (LII link)) regulated public offerings. The definition of accredited investor appears in Rule 501 of Reg D (LII link), which is a safe harbor exemption from registration. “Safe harbor” means that if an offering complies with the specified requirements in a rule, the SEC deems it to not be a public offering and exempt from registration.

And here’s the sizzle:

I find it continually amusing that we’ve gone full circle over the last 20 years from accredited investor status protecting less-savvy investors to being a tool for keeping the common man down. I think no one remembers the public venture funds (meVC is one dead (you can buy the name!) experiment by a Silicon Valley fund to create a public-ish venture fund).

Venture returns are great (when they are) because the risks are great. Most angel investments return $0.00. Most individuals who are not accredited cannot sufficiently directly diversify their venture investments, and so they take on more risk than they might expect looking at 20%+ returns for venture funds. The law of small numbers is unforgiving.

I hope it’s helpful to understanding why the rule exists, what the SEC does, why wide-open crowdfunding would make the SEC pass out, and why it’s a tough path for individual investors because finance (of the Nobel Prize variety, not the “Do I need a budget?” variety, to which the answer is “Yes, you do.”).

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