What Do Accredited Investor Laws and Voting Restrictions Have in Common? More Than You Think…

What Do Accredited Investor Requirements and Voting Restrictions Have in Common? More Than You Think…

Dealing with securities is a delicate dance for both investors and the companies they invest in. For investors, many are sitting on the sidelines while those who qualify as accredited investors are playing in the lucrative field of secondary markets. For companies, especially those experimenting with digital assets, they have to make sure that they follow the SEC’s guidelines such as registering as a security or qualifying as a utility token or face penalties. Securities laws such as the Securities Act of 1933 and Securities Exchange of 1934 were written in the wake of the Great Depression, and since then the world has witnessed several boom and bust cycles that have run parallel to the exponential progress of technology. It’s time to update these laws for the 21st century because some statutes, such as accredited investor requirements, are stifling innovation, proliferating income inequality, and moving innovation off American shores.

Accredited Investors, An Elite Caste

If you are not familiar with the term, an accredited investor is someone or an organization that has special status under financial regulation laws. In the United States specifically, an accredited investor is someone with a net worth (excluding their private residence) of $1 million, or an annual income of more than $200,000. The main privilege that comes with being an accredited investor is the ability to invest in unregulated securities such as private equity, private placements, hedge funds, venture capital, and equity crowdfunding.

The reason given that accredited investor requirements exist is in order to protect retail investors a.k.a. the common man and that only accredited investors are financially literate enough to take risks in secondary markets. By restricting individuals on the investments they can make, they not only protect the individuals themselves but the market overall from scams and unscrupulous investments.

Yet in reality, what accredited investor requirements do is create a class of the rich that keeps on getting richer through exclusive access to investments not available to the general public. In the past decade alone since the financial crash of 2008, accredited investors found massive success in investing in companies such as Uber, Airbnb, Spotify, Snapchat, etc. in their private rounds and seeing the value of them go to the moon.

How Do Voting Requirements Compare?

When researching accredited investor requirements, I couldn’t help but notice the certain similarities it had with voting restrictions in that existed in the United States from its founding up until the mid-20th century. It’s not a coincidence that in 2016, nearly 10% of households fell into the Accredited Investor category and when the Constitution was written, only 10%-16% of Americans were allowed to vote. I want to reiterate here that I AM NOT SAYING that they are the same thing, but rather arguments were made to restrict a class of people from participating in a process that they have a vested interest in.

Let me explain…

In the history of the United States, different requirements for voting have emerged at different times including land ownership, literacy tests, and poll taxes. Other than the fact that voting was only granted to specifically white male landowners, the parallel between land ownership and accredited investor status is that it isn’t something that one applies for but rather a standard set by the government that one attains. Basically, if you have X, (land or a certain amount of assets), then you can participate in this activity (governance or private financial markets).

The reason given behind literacy tests was in order to have an “educated and informed population” at the voting booth but in reality, was used to discriminate against immigrants and minorities from participating in the electoral process, especially in the south. One reason given for accredited investor requirements is that same idea of being “literate enough” and that those who have achieved accredited investor states have proven to be financially literate enough to make high-risk investments. Today, that argument does not hold up due to the fact that the internet allows us to educate and inform ourselves about risks and securities more easily than ever.

Although accredited investor status has been touted as a way of protecting investors, it has been a double edge sword, restricting individuals from opportunities and allowing the rich to get richer while the middle-class shrinks, proliferating inequality. Just as poll taxes were a very legal way to keep people from voting by having a voting fee, accredited investor status has evolved into becoming a very legal way to restrict the middle-class from participating in wealth generation.

Unintended Consequences

Securities laws do not only affect investors, but also companies and organizations. Nowhere is this more apparent than in the blockchain and cryptocurrency space where organizations may pay hundreds of thousands of dollars for lawyers and accountants to make sure that they are complying with securities law. Teams are spending more time worrying whether they are complying with securities law rather than building their blockchain protocol. In addition, much investment, development, and opportunity are moving offshore to other countries because of these regulations, putting America at risk of losing talent and innovation to other countries in the long-term.

Securities laws were written in the aftermath of the 1929 stock market crash, and justifiably so. America was reeling from the Great Depression and action needed to be taken in order to prevent it from happening again. Yet, these laws were written in the 1930’s and are not accustomed to the advancements we have made in technology or the fast-paced world that we live in today.

What security law reform in the future should do is to loosen accredited investor requirements to allow common individuals to invest in startups. Some progress has been made with the JOBS Act, which allows companies to utilize crowdfunding to issue securities, but still more can be done. Furthermore, reform should define classes of tokenize assets, allow people to invest in them, and provide educational resources online about investing and understanding the risks. If these securities laws remain as they are, the United States will be at risk of becoming a financial backwater as up-and-coming countries utilize new tools that facilitate rapid capital formation for themselves and their citizens. The time is now for reform.

What Do Accredited Investor Laws and Voting Restrictions Have in Common? More Than You Think… was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.