Private investment in private enterprise continues to be the primary creator of wealth in this country. HNW investors know this all too well. It is estimated that so-called angel investors led the funding of more than 60,000 new private ventures in 2011. In January, the Institute for Private Investors, a private consortium of 1,100 ultra-HNW investors with minimum investable assets in excess of $30 million, noted in its annual Family Performance Tracking Survey that 55% of their members plan to increase their direct investments in private companies in 2012.
From the outset, the purpose of this column has been to encourage investment advisors to draw upon the wisdom of their HNW and ultra-HNW clients in recognizing that prudent investment in private ventures is an essential allocation component of any portfolio seeking to create wealth.
Seventy-year-old securities laws have restricted access to private venture investing to privileged, wealthy investors on the spurious premise that they are more “sophisticated.” As we have argued in the past, that is simply undemocratic and unfair. Venture Populist seeks to emulate the well-documented emerging fervor of angel investors and enable access to private venture investing to a broader investor demographic. Such that the vast majority of our nation’s private wealth has its roots in private venture investing and entrepreneurial activity, we maintain that the experience of private venture investing is a right of every investor, rather than a privilege that is to be bestowed upon an individual by an overly paternal government or regulatory regime based on arbitrary and bigoted notions of an investor’s “class” and relative wisdom.
It appears as though the spirit of venture populism is gaining momentum among progressive lawmakers. On Nov. 3, the U.S. House of Representatives passed H.R. 2930, the Entrepreneur Access to Capital Act, a “crowdfunding” bill that will allow startups to offer and sell their securities via crowdfunding and social networking sites. The bill, which passed the House with strong bipartisan support by a 407 to 17 vote, will allow stock offerings up to $1 million to take place on the Internet across state lines without the costly startup, legal, filing, accounting and auditing fees often associated with such offerings. H.R. 2930 would limit an individual’s investment via such a platform to $10,000, or 10% of the investor’s annual income, whichever is lower. The House bill also preempts state securities laws, thereby mitigating the time, energy and costs associated with state blue sky filings.
The House bill has the Obama administration’s support under the notion that revisiting these outdated restrictions on capital formation for new businesses (such as Regulation D and the accredited investor definition) would enable entrepreneurs and startups access to billions of dollars in previously restricted capital that, in turn, will promote the growth of the private sector economy. Robert Romano of Americans for Limited Government notes, “Raising unrestricted capital on the Internet [may help] small businesses and startups get rolling […] creating millions of jobs. It’s the kind of big idea that makes one wonder why the antiquated securities laws were ever adopted in the first place.”
The benefits of such legislation should be too obvious to state to readers of this column. However, the North American Securities Administrators Association, the SEC and a number of unenlightened lawmakers in the Senate want to water down the House bill to restore the states’ purview and dramatically reduce the proposed cap on an individual investment from $10,000 to $1,000 or even less.
The regulators’ and concerned senators’ view is that individuals who make less than $200,000 a year or are not millionaires are not smart enough to invest without getting ripped off. With the Obama administration publicly backing the House bill, there is reason to be optimistic that a bill will pass the Senate and be signed into law. It will no doubt be watered down and come in shy of democratizing investor access to private investment options, but it will allow us to follow the lead of Britain, Hong Kong and the Netherlands, where crowdfunding platforms are already successfully operating.