This is not a typo: Only 3% of Americans are legally allowed to invest in start-ups
By Elizabeth Scharpf, June 2015
Of the richest venture capitalists, all are worth more than $1 billion, and all are men. The majority of these have invested in Groupon, LinkedIn, Skype, YouTube, Paypal, Facebook and others. Chances are, you are legally barred from joining their exclusive investors’ club.
More than 97% of Americans cannot invest in the latest startups, nor profit from their meteoric rises. For example, Kickstarter and other crowdfunding platforms like Indiegogo and Rockethub do not allow “supporters” to own part of the organizations featured on the site, even though their donations are financial investments in those advertising funds or projects. That’s why most crowd funding platforms reward their supporters with goodies (a first run of a manufactured product, say, or thank you cards.).
Under US law, only “accredited investors” are legally allowed to invest and own a stake in a start-up.
So who are accredited investors?
An investor is accredited if he or she has a net worth of at least $1 million. That doesn’t count the value of their primary residence. Another way to become accredited is to have income of at least $200,000 each year for the last two years (or $300,000 together with a spouse) and expect to make the same amount in the current year.
So few Americans can meet these two ways of being accredited that, both legally and literally, any US crowdfunding investor must be part of an elite 3% of the population. And of that small group, only 300,000 individuals and 500 firms actually invest.
These select few determine what is new and innovative, and thus what the remaining 97 percent want, need and will use. With such an elitist system, it goes without saying that Americans are missing out on the discovery and implementation of thousands of effective solutions. But not for lack of ambition.
Many Americans want a way into the start-up investing market. Tellingly, millions of viewers tune in every week to watch Shark Tank, where anyone with a good idea can attract investors. In May, the ABC show had its highest ratings ever for the season finale as 6.7 million tuned in to see investment dreams come true.
But critics say lowering the bar for potential investors would be risky.
The reason the US Securities and Exchange Commission originally implemented such restrictive investor rules is because they feared the majority of the population would be unsophisticated in their investments, sinking their savings into untested companies and losing money. (The SEC does not restrict investment in publicly-traded companies.)
But this justification does not hold up when you realize that even certified public accountants, people with very high levels of proven competence and training, could not qualify today as an accredited investor without satisfying the minimum net worth requirement.
Right now, investment is very homogenous; venture capitalists, who are accredited investors and often lead the charge in early-stage investing, are 89% male. According to the National Venture Capital Association/Dow Jones VentureSource, white men make up 76% of the total number of venture capitalists in this country.
Only 10% identified as Asian, with 1% identifying as African American, and less than 1% as Latino.
The homogeneity is geographic, too: more than 90% of the venture capitalists surveyed lived on the East or West coasts.
If accredited investors reflected the American population and their needs, we’d have investors with different gender, ethnicity, rural, urban, different hobbies, habits and problems, As a result, we would likely also see different investment decisions and different entrepreneurs coming forward with solutions previously overlooked.
In her kickoff speech at Roosevelt Island last weekend, 2016 Democratic presidential candidate Hillary Clinton outlined plans to create a new, more equal economy: paid family leave, affordable colleges and tax relief for entrepreneurs. These policies, Clinton claimed, “make our economy work for you and for every American.” Still, she missed an important lever: the JOBS Act.
The JOBS Act will make it possible for anyone to invest in a start-up. Its full name is the “Jumpstart Our Business Startups Act,” and is scheduled for final action from SEC by October 2015.
It’s time for Clinton and others in Washington to make sure the JOBS Act is a top priority for a democratic economy. The definition of “accredited investor” needs to expand to include the everyday investor—and it has the potential to make the American Dream possible in the 21st century.
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