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Ask HN: Why do investors need to be accredited?

6 points by atom-morgan ↗ HN
I recently read an article[1] which stated that companies are only allowed to solicit investments from accredited investors. What's the reasoning behind this? Why can't anyone, including myself[2], who is willing to risk their own money invest in a startup?

[1] http://www.businessinsider.com/sec-announces-crowdfunding-rule-to-allow-startups-to-raise-1-million-from-unaccredited-investors-2013-10#ixzz2iaskUpYm

[2] http://blog.atommorgan.com/investors-need-to-be-accredited

11 comments

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wmf
In the Great Depression of the 1930s many people lost a lot of money by investing in unregulated securities. So now anyone can invest in highly-regulated securities and only rich people can invest in sketchy stuff.
atom-morgan
So the law is attempting to protect people from themselves?
logn
I'd like to think, protecting the middle class and poor from thieves.
atom-morgan
In that case, the link in joelgrus' comment raises an interesting point. If protecting people is the end goal, why are we allowing people to file their own taxes when they could face jail time as a result?
wmf
Yeah, in more civilized countries the government calculates it for you.
rpedela
That is correct. After the Great Depression, several "blue sky laws" were created which were designed to protect those without significant wealth from fraud. During the Great Depression, many people invested in securities which turned out to be Ponzi schemes. In other words, they were investing in "blue sky".

I am generally not for regulation to "protect people from themselves", but I generally agree with the creation of those laws. The crash in 2008 proves we do need regulation of securities to protect ourselves from destroying the global economy. Having said that, I am glad the JOBS act makes it possible for regular people to invest in private companies. I have always thought it was wrong that only rich people and founders can benefit so greatly from a startup's acquisition or IPO.

joewallin
If you generally solicit, under Section 201 of the JOBS Act, all of your investors have to be accredited.

If you don't generally solicit, theoretically, under Rule 506(b), you can have up to 35 non-accredited investors. BUT, if you even take one you have to provide IPO level disclosure. Ridiculously expensive. See this blog post: http://www.startuplawblog.com/2013/01/14/cant-i-let-non-accr...

zaroth
The bar for accreditation is extremely low - investor signs a piece of paper making a claim about their net income or personal wealth, but no actual validation must occur.

SEC wants to strengthen the validation requirements, which would increase compliance costs a lot, and so generally business world is against this.

The more striking limitations are around solicitation - how you actually find your investors. "General solicitation" is vaguely defined (here's looking at you, angel.co). But basically, it's like the first rule of Fight Club, no one ever talks about it, yet somehow more people keep showing up!

cmac2992
Its to prevent "Grandma Sally" from investing her retirement savings in high risk start-up because she isn't "financially sophisticated" to understand the risks.