In all the hubbub about taxing unrealized gains and its downstream effects I found myself explaining the basics of early stage venture economics to more regular folks than I’d expected.
Most America s don’t know that it’s not legal for them to invest in startups. I was explaining how one becomes an “accredited investors” with a Normie family member and their indignation was heartwarming.
In the United States, an accredited investor is defined by the Securities and Exchange Commission (SEC) under Rule 501 of Regulation D. This designation allows individuals and entities to invest in unregistered securities, which are often considered riskier but can offer higher returns. To qualify as an accredited investor, individuals must meet certain financial criteria:
- Income: A natural person must have an annual income exceeding $200,000 in each of the two most recent years, or $300,000 combined with a spouse, with the expectation of maintaining that income level in the current year[1][2][4].
- Net Worth: Alternatively, an individual can qualify with a net worth exceeding $1 million, excluding the value of their primary residence[1][3][5].
- Professional Criteria: Individuals with certain professional certifications, such as Series 7, 65, or 82 licenses, or those who are “knowledgeable employees” of a private fund, may also qualify[1][6][7].
Entities can qualify if they have assets exceeding $5 million or if all equity owners are accredited investors[5][6].
These criteria were expanded in 2020 to include more professional qualifications and entities, aiming to increase the pool of potential accredited investors[1][6].
Naturally it struck them as a bit rich that they can only invest in a startup if they are a millionaire.
You mean to tell me it is illegal for me to invest in your startups but I can bet my life savings on the ponies? That’s ass backwards!”
It was pointed out to me that this is “a form of economic paternalism, which usually does more harm than good” by Kevin Dalhstrom and I’m inclined to agree.
If you know enough to take a small risk on a startup you should be allowed to do so. And taxing those gains before they are realized is a stupid policy. Let’s get big daddy government out of the business of dictating how we spend our money. I’d rather invest in a nuclear reactor than gamble it all on Weeping Somnambulist at 10 to 1 odds.