Like many of you, I spent most of the second half of 2011 glued to my television screen, watching the Occupy Wall Street protests swell from a grassroots campaign to a full-scale movement with global attention.
What struck me as most odd about the whole thing even back then was the focus on Wall Street, and not on Capitol Hill or the White House…
Yes, of course, there is a great wealth divide in this country between the so-called 1-percenters and everyone else. But even that anomaly is rooted in legislation adopted in Washington, D.C., decades ago — not any systemic abuses in New York City.
It all goes back to the signing of the Securities and Exchange Commission back in 1934 and the establishment of what today is known as the “Accredited Investor Rule.”
This sounds innocuous enough. But trust me when I tell you that this rule might be the No. 1 obstacle keeping middle class Americans from joining the ranks of the rich.
These aren’t open-market trades, like the kind you buy through Scottrade, or ETrade, or your live broker…
These are private deals with owners of companies not yet listed on public exchanges.
Private, as opposed to public, means they are not subject to the same scrutiny and regulation as shares traded on the NYSE or Nasdaq. In short, this is the very definition of ground floor.
And the results are almost too great to comprehend…
The two best-known stories in the recent history of private equity are:
- First Round Private Financing for Google – Returns to Date: 10,400x initial investment
- First Round Private Financing for Facebook – Returns to Date: 12,400x initial investment
Mind you, those gains aren’t in percentages. An elite group of investors actually made thousands of times their money back.
As I said, however, those two are the biggest recent examples of the sorts of gains that accredited investors bank.
Smaller, but still eye-popping, gains are more or less common in the tech sector — and accredited investors get to monopolize all of the early-stage financing opportunities because, well, the Federal Government said they could.
According to the Federal Securities Laws Rule 501 of Regulation D:
Unless you and your spouse have a million in cash in the bank (that’s not including your home and minus all liabilities), or you’ve been bringing in $200k or more in income for the last two years, you’re legally barred from ever putting a dollar into any of these early-stage companies.
Companies like Goodreads.com, which recently returned its early-stage investors 62.5x their initial investment, or a 6,250% gain when the company was sold to Amazon…
Or Instagram, which netted its early backers 57x their money, or 5,700% gains when that company sold to Facebook in 2012…
Or literally any other company you’ve ever seen go public: Apple, Microsoft, Dell, Tesla — they all had their accredited investors… and all of those investors are now millionaires, hundreds or thousands of times over.
All the while, a vast majority never had the chance.
The reason for this rule, as many government efforts tend to be, has to do with the safety and security of investors the Feds consider to be “unsophisticated.”
These fast-gaining investments are considered too risky for non-professionals of average net worth, so the opportunity is closed off.
What should really be troubling is that this concept isn’t isolated to the United States. In Europe and Canada, similar rules are in place, all for the supposed “safety” of the casual investor.
Ironically, the Accredited Investor Rule has the exact opposite effect as far as keeping casual investors safe from their own supposed lack of sophistication.
Take the case of Peter Thiel, one of the early backers of Facebook who invested half a million back in 2004, when Facebook was first making its appearance as a college-oriented social media website…
When the company IPOd eight years later, Thiel’s initial investment was worth more than $6 billion.
Meanwhile, most people who bought the stock on the open market the next day have either written off the losses, or are just now breaking even as Facebook stock surges for the first time since going public.
Another major investor in Mark Zuckerberg’s social media monster?
Lead singer of U2, the man who needs only one name: Bono.
Through his venture capital firm, Elevation Partners, Bono’s initial investment in Facebook in 2009 was worth more than $1.6 billion today as shares trade for $38.
The difference between you and Bono, in this case, isn’t that he’s a rock star. The only difference that matters is that he had more money going in. As a result, he became the richest musician alive — while you became broke buying retail.
If you think that’s unfair, I agree.
But don’t go complaining to Wall Street about it. This is the work of Washington, D.C.
Wall Street, in reality, has no interest in excluding anyone…
Your money is as green as Bono’s.
So what some clever finance guys created — and what we recently discovered — was a loophole.
The Accredited Investor Rule has done a remarkable job of making the rich richer while excluding everyone else. This has been going on since the Great Depression.
Well, now there’s a way to get around it…
To get the full report, click here.
To Your Wealth,
Brian Hicks
Check us out on YouTube!Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.
