What it Means to Be an Accredited Investor Today


At Florida Funders, we’re always working to ensure that we’re compliant with any current and future regulations around fundraising. With the passing of the JOBS Act in 2012 came a rise of crowdfunding platforms and companies like Florida Funders working to democratize investing in startups to a wider range of potential investors. With the influx of new ways to invest and new types of investors, there has been an ongoing dialogue between investment firms and the SEC.

Those conversations have resulted in new rules from the SECs regarding who qualifies as an accredited investor. We would like to discuss what has changed as well as explore the general topic of accreditation. We’ll also cover the most salient critiques of the current accreditation system, despite the good intentions behind the rules. 

Accreditation: You Must Be This Rich to Ride

Virtually anyone can invest in publicly traded companies, regardless of profession or income. If you want to buy 5 shares of stock in Tesla, you can do so, provided you have the money to purchase them. However, when it comes to private companies, only a small group of people can legally invest, with some notable exceptions. 

Accreditation is the key to accessing private capital markets. So what does it mean to be “accredited”? 

Accredited investors are individuals or firms that the SEC deems worthy of assuming the risk of investing in privately held companies. Historically, those deemed worthy have been the very wealthy. For individuals, this meant a net worth of over $1 million (excluding your home value) or annual income exceeding $200,000 for the last three tax years. Investor accreditation guidelines are seen as a way to protect regular Americans from being taken advantage of or over-exposing themselves to financial risk. The thinking goes, if you’ve got the wherewithal to earn that kind of money, you’re probably smart enough to validate an investment. If the investment doesn’t produce a return, you’re rich enough for it not to matter.

Meanwhile, an 18-year-old can go to any casino, drain their checking account, take out a line of credit, and put it all on black. 

Criticisms of the System

For years, there has been a growing chorus of valid criticism around accreditation guidelines. To illustrate, a recent academic paper called on the SEC to do away with the distinction altogether. The paper, entitled Abandon the Concept of Accredited Investors in Private Securities Offerings, calls on the regulatory body to do just that. The SEC, apparently receptive to such an idea, uploaded the paper to its website. In the paper, Dr. Andrew Vollmer goes through a list of real flaws in the accreditation system…and there are plenty of flaws to list.

The obvious flaw is that accreditation conflates affluence with acumen. Of course, not all wealthy individuals are more qualified to make risky investment decisions, and not all qualified investors are rich. If the system’s intention is to protect unknowledgeable investors, such protections should be extended to all ignorant investors, not just those of humbler means. A wealthy actor can invest in a private company despite not knowing how to balance a checkbook. A CPA, on the other hand, is deemed unqualified to do so unless she is making partner level salaries, despite her qualification to audit that company. A lawyer could draw up the legal documents for a private company investment deal, but not have the assets necessary to legally invest in the deal himself.  

Another major critique of the accreditation system is that it favors the rich. Previously, would-be accredited investors had to satisfy net worth or income minimums in order to enjoy accreditation. This was virtually the only way for an individual to reach accredited investor status. This makes investor accreditation seem more like an exclusive club, based on station or income, than a means of protecting investors.

A third issue is that such a policy has negative implications for market distortion and economic inequality. It doesn’t take an expert to see to the danger in making an entire investment class only available to those of a certain economic class. Not only does such a policy concentrate access to investments in the moneyed elite, but it also distorts private capital markets by limiting the supply of investment. The system is undeniably regressive in terms of access; wealthier people have greater access to investments, with no consideration for qualification.

These factors combine to create a less than ideal situation in private capital markets. An accredited investor has access to investments that are less expensive than the efficient cost (since not all potential buyers are eligible to participate), amplifying her existing wealth advantage. She also may not be as qualified as her status implies to make investment decisions, since wealth does not equate to financial savvy.

These concerns have rung out for years, and the SEC took notice. 

New Rules: It’s What You Know (Or Have)  

In response to these criticisms, the SEC has recently expanded eligibility to become an accredited investor. The new rules open accreditation up to those of more modest means but ample knowledge, which is a very logical move. Those with certain certifications, such as a Series 7, or knowledgeable people who work for an investment fund, family office or investment company, can now enjoy accreditation status as well. Prior to these changes, some of the key employees at Florida Funders may not have qualified to invest in deals that they themselves are vetting. We can’t say what an SEC attorney makes, but it could very well mean that those writing the laws around investing in startups may themselves not actually be able to invest in them. 

In announcing the changes, SEC Chairman Jay Clayton lauded, “Today’s amendments are the product of years of effort by the Commission and its staff to consider and analyze approaches to revising the accredited investor definition. 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.”

The SEC has taken a positive step to address some obvious rational and practical flaws in the accreditation system. However, these changes did not fix an inherently flawed system. On our podcast, we recently interviewed one of the most prolific Angel Investors in the world, Jason Calacanis. He runs Angel University for would be angel investors, and he talked to us about how he can go into a gun shop and take a course to conceal carry a loaded firearm, but a CPA earning $100,000 a year can’t take any kind of class that allows him to invest $5-10,000 into one of Florida Funders’ startups. 

Issues Remain

The truth is that even with these positive changes toward greater democratization, accreditation is still too difficult to come by, too exclusively enjoyed by the elite, and too detached from what truly qualifies an investor. To illustrate, a financial novice with $1 million in liquid assets (of which there are many) can still access a far larger range of investments than an accountant earning $150,000 a year.

In contrast, the average American can trade complex options with a tap on apps like Robinhood that can become worthless overnight but cannot invest in a high-growth, profitable tech company that is privately held. If the intention is to protect lower-income Americans, this system clearly falls short of that noble goal. The real effect is that access to some of America’s most attractive investments is limited to those with substantial wealth already. 

If you look at the history of some of the best performing tech stocks over the last several decades, you’ll notice that many IPOed at substantially lower valuations some 10, 20, 30 years ago than similar tech companies that are going public today. One of the main reasons is that companies have much more efficient access to private capital and they don’t need to IPO at low valuations – meaning exciting young deals are no longer available to investors on the public markets.  

As suggested by Dr. Vollmer, perhaps the best solution to these problems is to simply do away with the distinction of accredited investor. As he suggests, replacing the system with mandatory disclosures could better protect both investors and the companies selling securities, while respecting the rights of both parties to partner with whomever they see fit.

The Bottom Line

The SEC’s update to accreditation status is a welcome change. Unfortunately, we still believe that there is further to go in ensuring that all Americans have the same access to investments. While the intentions behind the regulation are noble, the effects are market-distorting and exclude the average American from an entire class of investments that appears to be growing with no end in sight.

If you’re an accredited investor, and you’re interested in what we’re doing at Florida Funders, feel free to reach out to our VP of Investor Relations, Saxon Baum, [email protected] 

Written by Michael Kadow, VP of Operations at Florida Funders. Michael handles all things regulatory and SEC related for Florida Funders and also manages our investor Portal.


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