The Fair Investment Opportunities for Professional Experts Act. A big name for something that is part of an even bigger Act, the Creating Financial Prosperity for Businesses and Professionals Act that recently passed through Congress. Six different bills were packaged in this Act, but the one we’re concerned with is the one dealing with investors and what defines an accredited investor.
Under the current rules, an accredited investor must have more than $1 million in net worth, or one who earns more than 200k a year. With the new proposal, the definition of an accredited investor will be expanded to include those with securities-related licenses, including brokers, and those that have experience or education in an investment they feel strongly about. Now, what exactly qualifies as “experience” has yet to be defined, but it will be interesting to see how they manage that part of it.
We had a chance to talk with Alex Mittal of FundersClub to ask him how he feels about the Fair Investment Opportunities for Professional Experts Act and to learn more about it, as well. Check out the interview below!
How do you see the act changing the investment climate for startups?
Transformational, but not for the reasons one might assume.
First, it’s transformational because it further democratizes the natural selection process of innovation. Wealth inequality in the US is at historical highs. That means the collective capital of those qualifying under the new rules pales in comparison to what wealthy accredited investors and VCs can invest. However, startup investing is collaborative. Having more taste makers with unique sets of experiences and wisdom shines the light on new innovation and speeds the arrival of disruptive new companies.
We saw this with early headset presales of the VR company Oculus, and we saw this again with Bitcoin, cryptocurrency and blockchain, where early adopters who saw the value before others didn’t necessarily have the largest pocketbooks. Only later did institutions with deep pockets rush in. The other way the act is transformational is it democratizes the individual investor’s ability to benefit from the wealth creation of innovation. We’re now living in a zero yield world. Tech companies, which tend to create immense value when successful, are taking longer and longer to IPO (think Facebook with it’s $100B market cap IPO vs. Amazon with it’s $438M market cap IPO). The game is rigged against the non-wealthy, while the wealthy are able to use investment access enabled by their wealth to beget more wealth.
The new act “unrigs” the game for the first time in a generation. While startup investing is risky, if you are willing to put up risk capital for a startup investment, you will be able to do so and reap the reward or cost of doing so.
Do you think this will change FundersClub’s strategy at all?
Our strategy has always been to leverage software and networks of people to better discover, fund, and support the world’s best founders, and to provide investors with investment access to the world’s most promising startups. The key change is being able to introduce a far greater number of people to our community who may not be uber wealthy, but who are uber knowledgeable and educated about their fields of expertise and about the dynamics and risks of startup investing.
This greatly enhances the network effects and scale we enjoy as an online VC firm. Not all of our activities are limited to money. Information, access, and introductions are also currencies with incredibly high value in our world of venture capital.
Do you think there are any negative points or challenges to the act passing?
The act received nearly unanimous, bipartisan approval in the House and is expected to pass unchanged in the Senate this month. It’d be very surprising if the act isn’t signed into law in Q1. One challenge is that Congress is passing the law, but the SEC and FINRA will be writing the rules as regulatory agencies, and that takes time. The regulatory bodies will need to balance the interests of various parties with the letter and intent of the law.
Another challenge is invariably people are going to use the act to draw non-wealthy investors into investments that do not have a risk-reward profile and liquidity path that make sense. For instance, equity investment in private companies that have no future hope of a large acquisition or IPO even if successful, or where future distributions are promised but the underlying business is too weak to support more than break-even operation, if that.
One reason most VCs focus on tech companies and not traditional brick-and-mortar businesses is that tech is well suited to risk capital–the winners in a portfolio can be so astronomically big that they can more than offset the losing investments, and liquidity through an eventual acquisition, IPO, or secondary sale is expected in those cases. In categories like bars, restaurants, etc, that may not be be the case. Debt probably makes more sense there. And in that case, you have to examine why the banks and even the newer alternative lenders are not already lending to businesses still seeking debt.
One part of the Act is to allow those who have “education or experience related to an investment” – do you have any thoughts about how that should be gauged? Have you heard anything from your investors about it?
This is an example of an area that will need to be better defined in subsequent rule-making by the regulatory agencies. The most practical solution might be a startup investing course and certification. FundersClub already offers a series of ebooks for example at www.fundersclub.com/learn that could provide a template for what is possible in this area.
In general, do you feel the act is a positive thing for startups?
I’ve been bearish on a lot of past legislation that was passed with the good intention of helping provide better funding to startups and better investment opportunities to investors. This is literally the first act that I’ve seen in 5+ years in this area that I support.
The key reason is that it does not place a single extra burden on startups. The burden to qualify is placed on the investor. This is in contrast to the adverse selection incentive that affects JOBS Act crowdfunding. There, startups must make compromises like regularly make their private financials public, regularly make regulatory filings, potentially run expensive audits, and other overhead in order to receive funding.
We’d like to thank Alex for taking the time to answer some of our questions. If you’d like to learn more about the Act, here is the official wording for it in its entirety.
This post is part of our contributor series. It is written and published independently of TNW.
This post is part of our contributor series. The views expressed are the author's own and not necessarily shared by TNW.