Around 2006 my friend Erik acquired Chess.com. It was previously a site selling chess learning software. The company went bankrupt, and he bought the assets for pennies on the dollar.
We had worked together on a few projects, so when it came time to fund his new business, he offered me the chance to buy a $25k block of equity. I was ready to jump at the opportunity, but lawyers informed me that since I was not an accredited investor, it wasn’t going to happen. To qualify as an accredited investor, you need to make over $200k/y, or have a net worth of $1m+. So I couldn’t invest, even though I had the $25k (which is not usually the case).
Today those original blocks of equity trade on secondary markets for around $500k according to Erik.
Does that burn? Yeah, sometimes it does. But it’s also the reason I’m so excited about equity crowdfunding. It’s going to open up countless opportunities for business people and investors. That’s if it’s done right (more on that here).
What’s disturbing to me about the SEC’s accredited investor rules is how elitist the whole thing is. The laws are supposedly designed to protect investors, but it’s more about protecting the upper crust and Wall St. Reserving certain privileges for the wealthy under the guise of shielding investors. Kind of like how landowner laws have favored elites for centuries.
What about scams? Well, risk is unavoidable, in any market. Why are we allowed to buy shady pink sheet stocks, but not invest in promising startups?
There’s no good reason to forbid small investors from providing startup capital. It hampers innovation and growth, while reinforcing the financial oligarchy.
Most people assume the laws, even if flawed, are well-intentioned. I don’t believe that, but I guess it doesn’t really matter. Equity crowdfunding is coming, and that’s a good thing. It’ll take the Feds a while to get workable regulation in place, but that’s par for the course.