The “Accredited Gambler”

Paul Zettler
5 min readJan 19, 2021

I said in my first post that I was going to jump around to different topics that I was interested in. This topic is specifically pointed at the Accredited Investor title, what the requirements are to be an Accredited Investor, and what this moniker allows you to do. Specifically, what it allows you to do in the angel investment and venture capital community and what constraints have been given to those not considered Accredited.

Full disclosure, I’m not a lawyer, so my understanding and nuances regarding the legal restrictions is at the 10,000 ft view at best. This post is more analyzing on what someone can and cannot invest with their income as a non-Accredited Investor and comparing that to what they CAN.

For further context, I’ve been in the VC/Angel investing industry for the past 10 years or so, and as far as I know, the only way for a company to raise money and avoid a significant amount of regulatory scrutiny is to bootstrap (fund themselves), raise money from accredited investors, raise money from family offices/VC funds, or raise money from some alternative avenues such as crowdfunding sites, grants, incubators, etc. Most founders that want to raise capital, have a “good” idea, or have a background that warrants investment will raise money either from seed venture funds or Accredited Investors.

To be considered an Accredited Investor, one has to certify to one of the following criteria:

· Have an annual income exceeding $200k/year for last two years

· Net worth exceeding $1M

· Private business or organization with assets exceeding $5M

There are few, if any, true seed investment funds outside of the large cities in the US, so the businesses in this “seed” stage for 90%+ of the United States seek out these Accredited Investors commonly referred to as “angel investors” or they bootstrap their business with their own time and money. So the Accredited Investor designation is extremely important, as it is where most startups can go to raise angel capital without jumping through a bunch of regulatory hoops.

To be fair, these regulations have been put in place given the high risk/reward nature of the startup ecosystem as well as the lack of liquidity when investing in the startup. So a certain amount of knowledge and/or disposable financial income makes sense and is completely understandable. And ultimately, it is up to regulators to protect the average person from investing in entities or vehicles that are illiquid and highly risky, which is predominantly why the rules are the way they are for this type of investment. There were a number of lawyers that looked to help craft new regulation to protect both investor and company in the (https://thestartuplawblog.com/sec-concept-release-letter/), but largely the ability to invest in startups remains with a limited number of professionals mostly to avoid unwanted lawsuits and illegal security filings for ineligible people.

Now to the crux of the issue. There are a significant amount of I’ll say 25 — 40 year olds who have money saved, have friends that are creating exciting startups, and would like to invest $100 in the opportunity (as an example). Ultimately, this group is shut out due to not qualifying as Accredited Investors. As non-Accredited Investors, you are not allowed to invest in your friend’s business venture without running up a big legal bill, but what I find interesting is what we CAN do a lot of other things with that $100:

· Stocks

· Bonds

· Venture Capital ETFs

· Private Equity ETFs

· Real Estate

· Treasuries

· Money Market

Additionally, we can use that $100 to buy food, grab drinks with a friend, or do some other risky activities that are currently sponsored and encouraged by our own state and local governments.

· Lottery Tickets (Scratch Offs)

· Sports Gambling

· Charity

I created a chart of the expected return over a 10 year period for what people are and are/not allowed to do with that spare $100, and I’ve highlighted the two asset classes that generally require you to be an Accredited Investor. I’ve also cited where I found the returns data in case anyone would like to dig in further. These returns are based on a 10-yr investment horizons with an annualized IRR consistent with the cited footnotes.

Now, angel investing and indices of venture capital and private equity are two completely different animals. But they are the most comparable from a risk/return mechanism as compared to the publicly available asset classes. So both asset classes that have the highest returns are basically shut out from everyone other than the <1% of the public that could be considered Accredited Investors.

But my biggest issue here is more about the hypocrisy that I’m allowed as a non-accredited investor to gamble on sports or buy scratch off lottery tickets which demonstrably have a lower IRR and return capacity, but I’m not allowed to invest that $100 in a friend’s startup without forcing the company and myself to jump through significant regulatory hoops. Does that seem right? Furthermore, and probably undermining the overall message here, is that I’m able to donate that same $100 to charity, which has a net tax benefit if claimed, but ultimately doesn’t yield positive returns to myself that an investment in a friend’s startup potentially could.

That’s not to say there isn’t an ability to do this through crowdfunding, syndicating, and other entities have tried to fill the vacuum here. Here’s a great article showing where and how to do that (https://www.thebalance.com/how-can-average-people-invest-in-startups-4588451). But the point still remains why you need to go through vehicles such as that when you can use that money to do much more risky endeavors.

I’d love to see some more nuanced regulation surrounding micro-offerings with streamlined regulatory rules especially for early stage investments. Obviously, most people that don’t meet the accredited investor rules will not have the deal flow to invest in companies raising $1M+ rounds. But a small $10k — $50k round with 10 friends at $1k — $5k a piece to see if something could potentially work? Two simple ways I think would help streamline this without letting it get

1) Allow those that hold certain FINRA designations specific to securities and understand risk/reward and liquidity principales(Such as Series 7) to be qualified to invest personally.

2) Create a simple accreditation similar to other FINRA exams that aren’t based on new worth, but on risk/reward appetite and understanding what investing in startups means.

One of the biggest reasons I’m writing this is the idea that in 2018, Tennessee citizens “invested” $1.4B in scratch offs with highly negative returns. By comparison, all venture capital investments in the state totalled $819M in 2018. So we are allowed buy lottery tickets at a gas station but we aren’t allowed to buy a “startup lottery ticket” by betting on a friend’s startup.

Hopefully over the next few years, regulators will see the irony here and change the rules. Because to further emphasize the obvious, it feels like maybe we should look for rules and regulations that allow people to do what they want focus on value and wealth creation vs income and wealth erosion.

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