Illegal For 79 Years, This Loophole Lets Regular Americans Invest Alongside Silicon Valley Insiders

For 79 years, if you wanted the right to invest in early-stage companies like Apple in the 1970s, Facebook in 2004, or Airbnb in 2009, you had to be an “accredited investor.”

The concept came from a 1933 law that created the U.S. Securities & Exchange Commission (SEC) to guard against some of the excesses on Wall Street that had led to the 1929 crash and the ensuing Great Depression.

The Securities Act also held a provision barring any non-founders or other company insiders from investing in a pre-IPO company unless they had either a consistent income of at least $200,000 a year or a net worth of $1 million.

In theory, the law was to protect financially unsophisticated people from being goaded into investing in flashy but ultimately doomed companies. Unfortunately, there’s no denying that the law slammed the door shut on millions of people’s hopes of striking gold on pre-IPO opportunities – while Silicon Valley insiders made out like bandits.

Consider Peter Thiel. The co-founder of PayPal wasn’t a billionaire in 2004 – but he was rich and well-connected enough in Silicon Valley to be offered a chance to invest in Facebook back in the company’s early days. Thiel was able to turn the $500,000 he invested into $1.1 billion.

Or take Uber. In 2011, Amazon’s Jeff Bezos was part of a coterie of tech titans investing $37 million into Uber’s Series B funding. Just a few years later, Uber became the most valuable startup in the world.

In May 2019, Uber finally went public almost a decade after billionaires, Wall Street funds and tech moguls had gotten the first bite of the apple. This meant that regular Americans were at the very end of the line – even behind Saudi Arabia’s government, which was allowed to invest $3.5 billion in 2015.

But What Washington Takes Away, Washington Can Give Back

The JOBS Act now allows regular Americans to invest in startups – without being a company insider or millionaire.

Participating in startup funding is now legal for everyone through equity crowdfunding, or the practice of thousands of smaller, retail investors banding together for a wave of seed funding that can amount to millions or tens of millions of dollars.

For example, the advanced security technology company Knightscope Inc. KSCP raised tens of millions of dollars from retail investors before its IPO. Knightscope, which makes autonomous security robots, recently scored five contracts from clients ranging from a pharmaceutical company to hotels and a multi-family planning complex in Pennsylvania. 

With startups, investors should exercise caution. Most tech startups fail, and even many of the most lavishly funded startups in Silicon Valley don’t make it. So for investors who are new to startup investing, research and due diligence are essential.

Not Just A Matter Of Having Legal Access

Besides having these investing opportunities at their fingertips, Thiel and every other early investor benefitted from a network of venture capitalists and expertise that took years to build.

For investors without that time or inclination, other vehicles for startup investing exist. For example, platforms like StartEngine allows retail investors to invest alongside venture capitalists legends like Shark Tank’s Mr. Wonderful and Howard Marks, the co-founder of Activision.