Subject: File No. S7-06-13
From: Blake Porter

November 17, 2015

Dear SEC,

Accredited Investor requirements are ridiculous, ill-informed, and should be amended or abolished

You’re smart enough to gamble but too dumb to invest

Odds of winning the Jackpot in Powerball lottery: 1 in 292,201,338 or 0.00000034% 
Odds of winning $1M in the Powerball lottery: 1 in 11,688,053 or 0.0000086%
Odds of winning anything in Powerball lottery: 1 in 38 or 2.6%
Odds of winning a jackpot in a Megabucks slot machine: 1 in 49,836,032 or 0.000002% 
Average Las Vegas slot machine win percentage: 6.58% (You get $6.58 for every $100. In other words, it costs you $100 to obtain $6.58 in winnings).
Odds of 00 on a Roulette table: 1 in 37 or 2.7%
But the odds of a startup still operating after four years: 37 – 58%

Those are pretty good odds compared to gambling. Now I realize those may seem like pretty high success rates. Other startup failure numbers fly around click-bait headline articles all the time; 3 out of 4 (25% success) and 9 in 10 (10% success) seem to be really popular. However I’ve never been able to find legitimate, evidence backed sources for these higher percentages of failure. No one seems to be able to.
However, even if the Static Brain Research Institute is wrong (but also 4 years is not too long of a time frame) and we go with the extremely low end, 10%, investing in a startup would still be better odds than any traditional gambling avenue. Sure, the returns of a startup may not be as high as a Powerball jackpot, but you could still make a few hundred or even thousand percent return while creating jobs and fueling innovation. In 2012 alone, angel investors funded over 67,000 startup ventures and created 274,800 new jobs. Rather than the 0.01% interest rate your bank has been offering, you could have invested $1,000 in Facebook in 2005 and had $624,500 in 2013; $1,000 in Airbnb in 2009 = $589,667; $1,000 in Dropbox in 2008 = $391,500 (ibid).

Furthermore, “odds” isn’t exactly a good way to look at an investment into a company. The success of a company is not the roll of a dice or the result of a slot machine algorithm. There is of course luck involved but with a visionary founder and promising product, many businesses are at least moderately successful. I also don’t mean to paint a super rosy picture. All investment has risk and angel investing is especially risky. But bonds and stocks and slots and the lotto all posses varying levels of risk.

So why don’t you become an angel and invest in an early stage company?
 Well had you been approached by Mark Zuckerberg in 2005 or if you visited crowd investing websites like Angel List or Crowdfunder anytime before the date of this post, you probably would not have been allowed to invest in a startup.
That was because if you were not an SEC Accredited Investor it would have been illegal for you to invest in startup companies. For an individual to be an Accredited Investor you need to either 1) have $1,000,000 sitting in your bank account (the value of your primary residence does not count towards the $1M net worth requirement) or 2) have an income over $200,000 a year for the past two successive years (> $300,000 if married). These requirements leave about 91 – 97% of Americans (the exact number is difficult to determine due to primary residence being excluded as an asset/debt) unable to invest in startup companies, facilitate job creation, or be a part of great ideas. Although accredited investor requirements are not changing, tragically, those who are allowed to invest in private companies has changed.

Some Relief, thanks Obama

Thanks to the passing of Title III (and IV) of the JOBS Act (Jumpstart Our Business Startups), non-accredited investors are now allowed to “crowdfund” companies. [Quick aside, I say “crowdfund” because the JOBS Act was written back in 2012 and the term crowdfund is now synonymous with Kickstarter or Indiegogo. Crowdfunding, as many people currently know it, is funding a company by buying a product from them while it is still in its early stages in promise for that product when it is produced. However, “crowdfunding” in the JOBS Act refers to issuing shares of the company to the crowd, including non-accredited investors. From here on out I’ll call what the JOBS Act allows “crowdinvesting” (also known as Equity-Based Crowdfunding) and Kickstarter type funding as “crowdfunding” for clarity.] There are other parts of the JOBS Act but also relevant to this piece is Title IV (also known as Regulation A+) which allows small businesses to raise larger sums of money from un-accredited investors. Furthermore, Title II of the JOBS act moved us into the 21 century as well, allowing companies to raise money online. Title II was approved by the SEC in July 10th, 2013. Title IV on March 25th, 2015. And Title III was passed today (October 30th, 2015)!

Why did the JOBS Act have to be passed in the first place? Why are there accredited investors?

The accredited investor requirements were introduced decades ago during the great depression in 1933. During this horrible economic time, scams were abundant and snake oil was flowing through the streets. The idea was to “protect investors from risk”. While the intentions were good, I believe the execution was downright wrong. Rather than cracking down on corruption, regulators instead stifled who could invest in what. I assume the logic was if there were fewer people able to invest in scams, there would be fewer scams. Also, if people could not invest they could not be hurt. This is of course ridiculous; scams are still abundant as ever and many are even quasi-legal. Scammers just got more creative. For example, the newest multi-level marketing scams like It Works! and Shakeology dominate Facebook news feeds. Activist investor Bill Ackman took a one billion dollar short position that Herbalife would fail after his firm’s research revealed, among other terrifying things, that the scam’s bottom tier members have lost $3.5 billion to the top tier/executives. Ackman made hundreds of millions on being correct. However, these modern day scams are still legal and anyone is allowed to invest in them since Herbalife is a publicly traded company. Why isn’t the SEC protecting investors (and the public) against these scams?

More confusing still, nothing is stopping anyone over 21 from going into a casino with their paycheck and putting it all on 00 in roulette. A pensioner can pull slots till their monthly stipend is decimated. I could go on a daily fantasy sports site and bet my 1,000% annualized interest pay-day advance loan on a week of NFL games. Studies find that many people do not understand the odds of gambling yet they can participate in gambling (for review, Rogers 1998). There are also no regulations stopping someone from investing their life savings in sketchy, Over The Counter traded companies. For example, I can easily download the Robinhood investing app, transfer over all my savings, and buy shares of public, maybe-legal Marijuana companies. Of course the SEC warns against these companies, but they are legal to invest everything you have in them.
However, until now, I was not allowed to invest in the likes of Uber or Airbnb or Oculus Rift. Heartbreakingly I was not qualified to invest in Gimlet Media; an innovative podcasting company started by Alex Blumberg that, I think, is changing the landscape of podcasts. While starting Gimlet Media, the whole processes is documented in the podcast Startup, Gimlet Media opened up to crowdinvesting. The $1,000 minimum investment got a lot of people excited especially at a time when interest rates are near 0% and traditional savings accounts and Money Markets afforded nothing. However, many listeners would go on to be devastated when they learned they had to meet the ridiculous accredited investor requirements. Securities and Exchange Commission, why am I allowed to gamble all of my money away in a myriad of ways but I’m not allowed to invest in a company I believe in? Maybe the risk many gambling mechanisms posses are structured and lack volatility so they are “safer”? Or maybe the revenue the government enjoys from casino taxes and fees and the taxing the poor via the lottery is too great to pass up. I’m not sure.

I think the accredited investor requirements are ridiculous, ill-informed, and should be abolished entirely for natural persons. The requirements as they stand only leave the super wealthy able to invest in companies seeking start up money. The thinking goes the super wealthy are better with managing their money.This is quite an ill-informed metric, of course. Celebrities go bankrupt all the time. 16% of NFL players file bankruptcy. But the SEC still thinks the super wealthy can handle money better than all other income ranges; many of whom are likely experts in budgets, penny saving, and cost cutting out of necessity. PhD student studying finance at Harvard? No, you can’t invest either. The SEC determines you are unqualified and don’t know about investing or risk assessment. Paris Hilton knows more than you do, silly grad student. Why not work on closing economic inequality by allowing all persons the same financial tools? Why not let everyone have a chance to be a part of revolutionary technologies? Why not let the general public facilitate job growth?
Despite the SEC and Congress still thinking you’re a moron, not caring what you think, and not changing accredited investor requirements, they are allowing companies to offer shares, online even, to your un-qualified self, if the companies care to jump through their costly hurtles.

So what do all of these new and exciting rules entail?
JOBS Act Summary

Title II: Access to capital for job creators

Title II allows companies to advertise and solicit investments online, such as on Twitter or Facebook, through emails, or registered funding portals. This means if someone in your area wants to open a restaurant or electronics store, they could target ads to your area asking for startup money. This would be similar to how Kickstarter ads are targeted to you based on your Likes and demographics. Title II also allows companies to raise money online with SEC registered websites, called “funding portals”. This allows for true crowdinvesting. Since Title II was passed in 2013, there are already websites up and running that do this such as the above mentioned Angel List and Crowdfunder. Its worth noting Chance Barnett, CEO of Crowdfunder, fought a long and hard battle getting the JOBS Act passed and opening up crowdinvesting to the non-affluent. Until now these websites were closed to accredited investors only.

Title III: Crowdfunding

While the JOBS Act as a whole is great, Title III and IV have the largest implications for crowdinvesting. Title III allows the un-accredited to invest in startups! Of course there are still restrictions on us dummys in the form of limitations on how much you can invest in a single company. If you aren’t making or worth at least $100,000, you can invest a maximum $2,000 or 5% of your net worth per year in any given company (again, primary residence excluded in net worth calculation). Its a small amount but at least it is progress. If you are making or worth over 100Gs a year, you can invest a max of 10% of your income or net worth. Purchases also cannot be sold within one year of buying them. This would avoid short term capital gains tax.
Looking through Crowdfunder now, many companies have minimum reserves between $10,000 and $25,000 (You can make an un-accredited account in anticipation of Title III/IV passing). As of now this would exclude many people for Title III fundraising. You would need a net worth (excluding worth of primary residence) over $40,000 to invest more than the $2,000 limit. However, using the SEC definition of net worth the median household net worth, in 2010 was only $29,800. Hopefully with the passage of Title III companies will offer much lower minimums, say $100. Minimums like this would be absolutely vital to non-accredited investors. This way non-accredited investors can get exposure to say 30 companies with $3,000 which should provide a decent level of diversification to mitigate risk. Keep in mind, just $100 in Facebook in 2005 would have netted you $62,450 in 2013, approx $159,000 today. Quite a nice sum when the median wage was roughly $29,000 in 2014.

Title III also puts some requirements and restrictions on companies. Title III limits companies to raising $1 Million a year. Companies must report offers, file an annual report, and provide various other information to the SEC. For a more comprehensive list of the details, I recommend this article.
To summarize, Title III allows for companies to raise $1 Million a year through registered funding portals from non-accredited investors whom can contribute up to $2,000 or 5-10% of their income/net worth dependent on their income/net worth so long as the companies notify and file the proper documents with the SEC.
But as we know from Sean Parker, $1,000,000 isn’t cool. Absolutely it will help many startups but at some point in time they will need more than just a million dollars to grow; this is where Title IV comes in for the un-accredited.

Title IV: Small Company Capital Formation, also known as Regulation A+

Title IV largely sets out how companies can file for larger crowdinvestments. It is commonly referred to as Regulation A+ because security offering types outlined in Title IV are called “Regulation A+ Offerings“. Title IV sets out two tiers of investing rounds. Tier I allows for up to $20 Million in investments per year. To my understanding, non-accredited investors have no limits in Tier 1 offerings. Tier II is up to $50 Million. Non-accredited investors may invest no more than 10% of their income or net worth in a company offering a Tier 2. Tier 1 and 2 offerings will undergo both state and federal review however Tier 1’s go through the NASAA. Sadly, this means both Tier 1 and 2 offerings will need to register in every single state they hope to offer the security in. They could of course elect not to do this. Silicon Valley startups may only register with California to avoid the massive costs of registering with the other 49 states. This would shut out a lot of potential investors however it may be cost effective. Tier 2 offerings will also need to have their financials audited, preempt Blue Sky Laws, and submit annual, semi-annual, and current event reports.
While all of these regulations are reassuring for investors they pose a massive cost for startups that may elect to not raise capital through Regulation A+ offerings and my go with accredited investor reliant Regulation D Offerings. I really do hope with the JOBS Act and crowdinvesting more companies file Regulation A+ Offerings but to put the historic difficulty with Regulation A in perspective, of the nearly 55,000 offerings from 2009 – 2012, 16 were Regulation A (pre A+) with the rest being various Regulation D’s.

At least its something

While these are certainly exciting advancements in crowdinvesting, I remain bearish on what the future holds as the laws stand today. If state registration is reformed and becomes easier, Regulations A+ Offerings may become more prominent; although maybe the hype around them will lead to a surge of Regulation A+ ‘s. Otherwise, these offerings may be too costly for most startups seeking early funding. While it is a start, some speculate companies will not even bother with Title III and IV avenues of capital raising because they will be too costly.
Crowdfunding avenues such as Kickstarter have seen companies regularly raise millions and some even reach in the tens-of-millions of dollar. Companies and individuals don’t even need a final product to raise money through crowdfunding let alone file arduous amounts of paper work with the Commission. Due to the low costs of raising capital this way, many startups and even later stage companies may elect to take the 8-10% Kickstarter fee to avoid Regulation A+ requirements. They will also retain full ownership of the company; another benefit crowdfunding has over crowdinvesting.

A better, but not ideal, world

I don’t think the concept of an accredited investor will go away; it is so ingrained in legislation and the zeitgeist of regulators it may be here to stay for a long time. However, I propose a means of allowing someone who does not meet the capital requirements to earn the title of accredited investor. Anyone should be able to obtain the credit necessary to prove they are financially literate. There should be a system in which anyone can learn the necessary information assumed in the concept of accredited investor. And I think we already have the means to do so.
MOOC’s, or Massively Open Online Courses are, as the name implies, open courses anyone with an internet connection can take. Other educational platforms like Khan Academy exist which gamify learning but are complete with problem-sets, quizzes, and exams, similar to MOOC’s. There should be an online course run by the SEC which allows anyone to become an accredited investor. The SEC can work with MOOC providers, such as Yale University, and integrate the necessary courses such as Robert Shiller’s excellent Financial Markets. Khan Academy too already has a massive amount of content that includes Microeconomics, Macroeconomics, and Finance and Capital Markets. All of which are open, free, and available for the SEC to use.
The SEC would likely need to add in some original material to encompass the pedagogy of accredited investor. Perhaps Dr. Michael Piwowar, one of only three trained economists to ever be elected an SEC Commissioner, could use his academic experience to build a course with all the necessary topics, information, and regulations an accredited investor should be familiar with. Whatever cannot be covered with preexisting MOOC’s can be outsourced to professors familiar with topics.
Secondary material will likely also be useful. Problem-sets of scenarios would be exceedingly useful to teach those wanting to be accredited investors what to watch out for when investigating a potential investment. There could be video or audio guided read troughs of financial filings explaining what various variables and metrics entail.
I realize this would be a costly endeavor however the potential amount of funding it could unlock for small businesses would be massive. Since the financial crisis of 2008/9 banks have been lending less to small businesses. By allowing those yearning at the opportunity to become an accredited investor and participate in all offering types small business will have access to more liquid capital. SEC could solicit outside funding for such a program. I would be amiss if crowdinvesting websites and small business associations would not be interested in helping to fund such a program. Crowdinvesting sites could check the SEC data base of earned accredited investors to determine if a member signing up in indeed qualified. Furthermore, accredited investor courses will educate people on key economic concepts and principles which I think are vital to being an informed citizen of a democratic nation.
Earned accredited investor status should also translate to peer to peer lending sites. Many currently have capital restrictions such as 1) an income over $70,000 a year and a net worth (sans home and car) greater than $70,000 or 2) a net worth over $250,000. If you meet those criteria you are also restricted to lending 10% of your net worth. I think the income and net worth requirements should be waived for earned accredited investors but the 10% rule kept in place.


Spending money is already considered a form of free speech in politics. Politicians are also not the best at keeping the promises they make after you invest in them. However, you are free to spend your money as you wish despite the risk of the product (promises) never being fulfilled. While I appreciate the SEC’s attempt to protect citizens from fraudulent investments, I hope I have outlined a convincing argument for why accredited investor requirements are not an ideal way to mitigate the problem. On the contrary, accredited investor restrictions have hurt the vast majority of Americans by limiting what they are allowed to do with their wealth while those with sufficiently high capital participate in the massive returns american entrepreneurs generate. People should be allowed to spend the money they earned in any fashion they choose. It is irresponsible and morally questionable for the SEC to restrict citizens who have a desire to fund small businesses and to deny small businesses access to necessary capital.

Blake Porter
PhD Student in Neuroscience 
University of Otago