Who Accredits Accredited Investors?

In bull market or a bubble, people tend to fear missing out more than they fear losing money

NEW YORK, NY - MAY 15:  Traders work on the floor of the New York Stock Exchange during the morning of May 15, 2015 in New York City. The Dow Jones Industrial Average was slightly down in morning trading  after it closed near its record high yesterday. (Photo by Andrew Burton/Getty Images)

What if you didn’t have to have access to this room to make a hot investment? (Photo: Andrew Burton/Getty Images)

In this country, you can’t invest in a tech startup that hasn’t gone public unless they were an “accredited investor,” which begs the question: who provides the accreditation?

Fun fact: no one. There’s no list of startup investors with the green light. No one checks and says, “Yep, you’re cool. Here’s a certificate of accreditation.” Investors just need to meet wealth requirements. Apparently, Congress didn’t like the term “rich folks” so they made up this idea of an “accredited investor,” even if there’s no one really checking.

More on all that here. Accredited investors have made more than $200,000 per year for the prior two years or they are worth more than a million dollars (there’s exceptions to both of these points; it’s not law if it isn’t complicated).

Why the limitation? 

In short, the Feds want assurance that the people investing in risky ventures are rich enough to lose the money. The thinking here isn’t bad. As the housing crisis proved (and the DotCom bubble and the Roaring Twenties and the Gold Rush… etc), people are suckers for an asset bubble. We are living in a moment of high paper valuations and regular people wish that there was a way to get in on some of these startup companies before they go public.

You might be thinking: I’m no millionaire, but I’ve got $1000 I can afford to lose.

The problem is, in bull market or a bubble, people tend to fear missing out more than they fear losing money. If too many people lose money, though, it yield social unrest that becomes a problem even for people that sat the rush out.

More on when and what you might be able to invest in after June in coming stories.