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May 01, 2007

SEC Rules on "Accredited Investors"

While doing some research on angel investors, I came across an SEC rule that made me wonder how useful it actually was.  Rule 501 of Regulation D regulates who is able to be labeled an "accredited investor" so that a company raising private capital does not need to register with the SEC.  When looking through the requirements, I was surprised to find the income and asset limits the SEC places on companies that take capital on the private market.  Using these requirements, neither of my parents would be able to invest in a company I create without being first affiliated with the company as a director or employee.

Considering one of the best sources of capital can sometimes be friends and family initially, if you want to give equity to them instead of taking out a personal loan, I wonder how many people run into the problem of not knowing anyone rich enough to invest in them.  For example, if someone were to try to raise the money from a group of friends and family without naming all of them directors, they would have to register with the SEC.  With small investments such as this, the majority of the population is kept out of private equity investments in firms started by friends and family.

Not only is the average person barred from investing in their friends' business without a directorship or employment, but they are barred out of the another high-return asset class, hedge funds.  I agree with the comments in the article that just because you aren't a millionaire doesn't mean you should be disqualified from investing.  Having an asset threshold seems a bit arbitrary, more arbitrary than say one based-on IQ or education-level would be (not that I would advocate for one). 

Even with its intentions of protecting the average investor, the government isn't protecting the rest of the investing public though by having "accredited investor" rules.  It's merely ensuring that the average person will not have access to the asset creation vehicles that the rich have access to.  With so much debate over the rich-poor income/asset divide, you would think politicians would want equal access to investment products for every American.  If every American has access to all wealth generation products, then they should achieve the same returns on average, allowing the average person who is financially responsible to keep pace with their wealthier counterparts.

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