And not just space startups: the House passed a bill to allow non-accredited investors to invest up to ten grand in startups. This would undo some of the damage caused by Sarbanes-Oxley, though that still needs to be repealed as well (one of the many disasters of the Bush administration). It would also be a huge improvement over decades-long SEC rules that have prevented space entrepreneurs from easily raising funds. And yes, of course, there will be some bad deals. Caveat emptor.
And of course, it isn’t law yet. It still has to get through the Senate and signed by the president. I won’t hold my breath.
“It’s immoral to let a sucker keep his money.” – Canada Bill Jones
The article has it exactly backwards.
It says, “For the first time ordinary investors would be allowed to put up to $10,000 in small businesses that are not registered with the Securities and Exchange Commission” The “not” contained in the sentence is wrong. Under current law, anyone can invest anything they want in an offering that is not registered with the SEC. What the current law prohibits is small investors from participating in private placements through SEC registered member firms(brokerage houses). If one reads the plain text of the proposed statute, it allows non-accredited investors to participate in private offerings through an SEC registered member firm, i.e their local stock broker. Truly this is quite a watershed.
There is quite a bit of confusion, in the general public, about the specific legal meaning of “accredited investor” for the purpose of the Securities Act of 1933 – which applies only to member firms and their clients. I had a back and forth about this at Jon Goff’s blog not too long ago. I cut and paste some of the relevant text below. I start in reply to Jon’s query about why Reg D restricts private placements to accredited investors:
The ostensible purpose of Regulation D is to control brokers, not investors. Anybody can buy a private placement, not necessarily through a brokerage house. Only accredited investors can buy one through a broker.
“I still don’t get why we’re so concerned about protecting the 95th-98.75th percentiles from investment risks…”
With regard to that point, the purpose of Reg D is not to protect the bottom 98 percent but to capture the top two percent. This solely benefits the investment banking houses and brokerage houses who cater to them.
When I was a broker I would occasionally get a query from a client who wished to sell all or part of his own business. He would ask something like, “Do you know anyone who would invest in my auto repair business, it’s going great and I want to expand.”
I would politely reply, “Sorry, if I recommend any of my customers to you, that would be construed as a private placement. I can’t recommend your business/private placement to any of my customers who are not accredited investors. None of them are.”
He asks, “What can I do then? I only need a couple hundred thousand.”
Me, “I can refer you to the investment banking side, they can determine if your business is a good fit for any of our accredited investors and a private placement or they could underwrite a public offering for you”.
Him, “It’s only a couple hundred thousand, I am too small for them to mess with”.
Me, “I know, but the back office only wants me advising my customers to invest in things which generate commissions for the back office. If I refer you to any of my customers, the back office won’t make any money off the funds my customers invest with you.”