Last Wednesday marked a victory for Start Us Up — and for entrepreneurs everywhere. The U.S. Securities and Exchange Commission (SEC) updated its qualifications for who can be an accredited investor, a recommendation directly out of America’s New Business Plan that will allow more Americans to invest in new businesses.
“For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication,” SEC Chairman Jay Clayton said in the press release.
Previously, only individuals with an annual income of more than $200,000 or a net worth of over $1 million qualified as accredited investors — limits that privileged the wealthy and excluded would-be investors who could boost America’s new business ecosystem.
“The trouble with a wealth- and income-based standard of sophistication is that it ignores other sources of sophistication – like being a financial professional licensed to advise other people in how to invest,” said John Dearie, founder and president of the Center for American Entrepreneurship, a coalition member and longtime advocate on this issue. “It also favors investors in high-cost, high-salary coastal cities over investors that live in the lower cost, lower-salary interior of the country.
Dearie also shared that, in 2018, SEC Commissioner Hester Peirce estimated that “90 percent of the population has been excluded from many of the most important and potentially rewarding investment opportunities.
“The broadening of the definition of accredited investor is long overdue and very good news for startups,” he said. “More accredited investors means a larger pool of available capital that can be tapped by young dynamic companies.”
As always, though, this is only a start. Especially when it comes to funding, startups face wide-ranging barriers, and the hurdles remain highest for entrepreneurs of color, women, and rural Americans. Our suggestion to update the accredited investor definition was but one component of a larger recommendation to unleash innovative funding tools. We also called on policymakers to:
- Raise the Regulation Crowdfunding offering limit so new businesses requiring larger amounts of capital may utilize this tool.
- Create tax incentives for investors purchasing securities offered by new businesses through qualifying crowdfunding channels.
- Improve regulatory flexibility and reduce compliance burdens in crowdfunding.
- Create standards that ensure transparency and fair treatment of new and small businesses by online technology-based lending firms.
“While this is a good first step by the SEC, the agency and policymakers should continue to examine other ways of making capital more accessible for early-stage businesses — including solutions that open up capital markets to greater investor participation and historically underrepresented groups,” said Engine in recent newsletter.
With increased flexibility, crowdfunding, among other online financing methods, hold tremendous promise for investors and businesses alike. The SEC’s willingness to move beyond restrictions that limited the pool of investors should be a model for policymakers everywhere in the fight to end startup stagnancy and bring greater inclusivity to entrepreneurship in America.