All startup founders know that getting investment is a difficult process, and it’s even harder for immigrant founders. One of the reasons is the legal requirement that limits the pool of accredited investors who are allowed to invest in startups.
Until recently, only those with a net worth of over $1 million or an average annual income of at least $100,000 could access private markets. The money-centric approach of the Securities and Exchange Commission (SEC) has been criticized for its narrow scope.
Apart from the racial and gender disparities of who could be included in this “accredited investor” pool, many finance professionals who are well-versed in assessing risks and rewards were excluded from investing in startups.
Although there’s a long way to go, the outdated requirements that have hitherto limited the opportunities for diverse funding are about to change.
In June, the U.S. House of Representatives unanimously passed the Accredited Investor Definition Review Act, which seeks to expand the pool of accredited investors based on their knowledge.
In 2020, the SEC recognized a new category of investor known as the “sophisticated investor.” This adjustment brought the U.S. in line with the global trend of accepting that financial knowledge isn’t solely linked to wealth.
U.S. catches up: The rise of “sophisticated investors”
The concept of a “sophisticated investor”, which is common in other countries such as the UK and Canada, considers not only wealth but also knowledge and experience in investing.
This broader definition allows for a more inclusive and diverse base of potential investors who align more closely with evolving global standards for startup funding. The introduction of this concept in the U.S can open new doors for startups seeking investment. It acknowledges that financial experience and understanding also play vital roles in evaluating an individual’s ability to comprehend and handle investment risks.
The benefits of this shift are manifold. Firstly, it expands funding possibilities by enabling a broader group of individuals to invest in startups. This includes finance professionals and others with relevant certifications or industry experience who may not meet the traditional wealth or income criteria.
Secondly, it broadens the investor base for startups, enabling them to tap into a larger and more diverse pool of potential investors. This development can be particularly beneficial for immigrant founders, offering them a wider range of funding sources.
This is an opportune moment for immigrant startup founders to act and benefit from these developments, expanding their networks and making vital connections. The road to fundraising might still be challenging, but the journey is increasingly navigable and promising.
Practical applications of this change
Here’s what immigrant founders can do with the new definition of “sophisticated investor.”
Broaden your search: Don’t just target individuals based on their wealth, but also consider their knowledge and experience in investing. This could include finance professionals, industry experts, and individuals with relevant certifications.
Expand your network: Attend industry events, webinars, and networking sessions where you might meet these sophisticated investors. Utilize platforms like LinkedIn to connect with potential investors and other startup founders. Participate in discussions and post about your startup’s progress in order to attract attention.
Use online platforms: Consider crowdfunding and other platforms to raise funds. Some platforms cater specifically to sophisticated investors who might be a good fit for your startup.
Prepare a strong pitch: Regardless of the type of investor, you need a strong pitch. Highlight not only your business plan and financial projections but also your team’s expertise and industry experience. This can be particularly appealing to sophisticated investors, who might value your team’s knowledge and skills as much as the potential financial return.
To all immigrant founders out there, my advice is to seize this moment to expand your network and establish crucial connections. Fundraising as an immigrant founder remains challenging enough, but these new changes will make the journey a little easier.
