The Big Story: SEC’s accredited investor update a good first step for startups. The U.S. Securities and Exchange Commission this week updated its “accredited investor” rules—which govern who can invest in early-stage, privately held firms—to allow individuals who do not meet the existing wealth threshold to participate in private capital markets. The previous rules only allowed individuals who earned more than $200,000 per year, or had a net worth of over $1 million, to qualify as accredited investors. The updated rule expands the definition so that potential investors are not judged only by their wealth, but by other features—such as having relevant knowledge and expertise—that can make it easier for qualified individuals to invest in startups.
The SEC’s amendments include a new category that allows individuals to qualify as accredited investors “based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution.” The agency also expanded the definition to allow individuals who are “knowledgeable employees” of a private fund to invest in the fund and clarifies that limited liability companies with at least $5 million in assets may qualify as accredited investors.
The accredited investor definition is critically important to the U.S. startup ecosystem, since the most common legal arrangement that early-stage firms use to raise funds often limits participation to those who qualify under the definition. Although startups can rely on other non-accredited investment approaches—such as equity crowdfunding—to raise funds, these methods often carry a prohibitively high cost.
By expanding the pool of accredited investors to include a new category for “professional sophistication,” the SEC is moving beyond the more restrictive wealth qualification that limited who could invest in startups. These wealth restrictions never considered the financial savviness of a potential investor, whereas the updated definition is more skills-oriented—potentially allowing a wider range of investors to fund nascent businesses. While this is a good first step by the SEC, the agency and policymakers should continue to examine other ways of making capital more accessible for early-stage businesses—including solutions that open up capital markets to greater investor participation and historically underrepresented groups.
Policy Roundup:
California consumer protection bill would impose strict liability standards on e-commerce platforms. A proposed bill in California—AB 3262—that is designed to hold “electronic retail marketplaces” to the same product liability standards as brick-and-mortar retailers, is receiving pushback. As drafted, the law would impose a high liability standard on e-commerce platforms even when those platforms never have access to the products sold by their users, and would be prohibitively expensive for small- and mid-sized e-commerce platforms, as well as their users and retailers. In a blog post, Josh Silverman—the CEO of Etsy—said that “small businesses, struggling now more than ever, will ultimately bear the brunt of the overbearing burdens of AB 3262.”
Advocacy groups sue over White House’s social media executive order. Five nonprofit organizations filed a lawsuit challenging President Donald Trump’s May 28th executive order on “preventing online censorship,” arguing that the directive harms voters who receive information online about mail-in voting by violating the rights of tech firms to ensure the accuracy of content shared on their platforms. A separate lawsuit filed last month challenged the order for violating the First Amendment rights of Internet firms and harming online speech. As we noted earlier this week, the Trump administration has been using the executive order to push federal agencies to regulate the content moderate practices of Internet companies.
Chinese and U.S. officials reaffirm support for phase one trade deal. U.S. and Chinese officials pledged during a phone call this week to honor a phase one trade deal between the two countries—a promise that comes as relations between Washington and Beijing have deteriorated in recent months. U.S. Trade Representative Robert Lighthizer said in a post-call statement that “both sides see progress and are committed to taking the steps necessary to ensure the success of the agreement.” President Donald Trump signed a phase one trade deal with China earlier this year that, in part, would push the country to end the practice of forced technology transfers. A phase two trade deal was meant to follow, in order to further address technology and cybersecurity issues, although the administration is no longer expected to prioritize the deal.
Trump administration announces $1 billion investment in AI, quantum research institutes. The White House announced this week that the National Science Foundation, the Department of Energy, and private sector partners will award more than $1 billion for the establishment of 12 new research and development institutes focused on artificial intelligence and quantum information sciences. The announcement comes after the White House’s 2021 non-defense budget—released last week—included a 30 percent increase in spending for artificial intelligence and quantum technologies.
White House considering new restrictions on exports of emerging technologies. The Trump administration is seeking public feedback as it considers implementing new restrictions on exports of semiconductor manufacturing equipment and emerging technologies that could present a threat to national security. The Commerce Department published a notice in the Federal Register this week requesting public comment on how to define new technologies as it determines “whether there are specific foundational technologies that warrant more restrictive controls.”
Engine joins letter asking FTC to seek rehearing of Qualcomm decision. Engine and 20 other organizations and companies—including ACT | The App Association, Tesla, and Intel—sent a letter to the Federal Trade Commission this week urging the agency to “continue to support innovation and competitiveness” by pursuing its antitrust case over Qualcomm’s licensing practices. The letter to the FTC’s five commissioners comes after an appeals court earlier this month reversed a decision that the chip maker was abusing its monopoly position. That appeal decision both “undermines longstanding U.S. law and policy” and threatens domestic competition.
Startup Roundup:
#StartupsEverywhere: Effingham, Illinois. MyAgData is an agricultural-focused data analytics startup that allows farmers to utilize acreage reporting software to simplify their reports for the U.S. Department of Agriculture and for crop insurance, and also gives lenders and insurers unique insights into their customer’s acreage productivity and health. We recently spoke with MyAgData’s CEO and Co-Founder, Deb Casurella, to learn more about the firm, their access to funding opportunities, and how policymakers can work to encourage young talent to stay in rural communities.
VC firms are beginning to use “diversity riders.” Ten U.S. venture capital firms announced this week that they are including so-called “diversity riders” in their term sheets to startups, which would push the firms to bring in historically underrepresented co-investors on deals.
