The SEC's new rules regulating what it takes to invest in a private company just went into action this morning. As a seed-stage startup, this is very interesting and I wanted to lay out my thoughts on what this means below.
To be a "qualified investor" in the past meant that you needed to make over $250k a year or have $1mil in assets. Basically you have to be in the top few percentile in the country. These rules were put in place for a good reason – to limit fast-talking businessmen from defrauding un-savvy investors out of their savings following the great depression.
Today with the internet and rising education levels and the expansion of the "investor class", the SEC's previous rules seem outdated. These limits are being lifted, opening up the startup world to a whole host of new potential investors.
The negative parts of this ruling is that we will likely see a bubble to begin with. The first deals that go viral and then totally bust will be a major blow to this investment strategy. It will make the path for all of those companies behind them that much harder. We are seeing that now in the world of hardware as we pay for the mistakes of our predecessors in needing to be further towards revenue and have a lot much more to show to overcome their hesitation from losing money on such investments in the past.
Overall, this ruling is a good thing for both sides - startups and the investment community. It helps relieve the pressure on institutional investment firms to provide seed funding for startups to get off the ground and gives the chance for those previously shut out from such investment to participate. My advice, if you are going to invest in a company, do your homework and spread your money around - 9/10 of these will fail. If you are a startup looking to raise money on one of these platforms, also do your homework. Look at the successes and failures of other campaigns. Get as far as you can without it, and go full out when you do look to raise.