Become an accredited investor as private companies avoid IPOs

In today’s ever-evolving financial landscape, understanding investment opportunities is crucial for building wealth. One of the most lucrative paths is becoming an accredited investor. This status opens doors to investment in private companies, which have traditionally offered greater returns than public markets. But what does it mean to be an accredited investor, and how can you navigate the complexities of this investment world?

Historically, companies like Microsoft, Google, and Facebook have shown how lucrative investments can be when entering the market at an early stage. For instance, Microsoft went public in 1986 with a market capitalization of only $500 million, which would be around $1 billion today. If you had invested just a modest amount in those early days, you could have reaped millions. Yet, the landscape is changing, and the public is increasingly left out of these significant investment opportunities.

Accredited investors have more access to unicorn $1 billion companies

In recent years, reaching a $1 billion market capitalization has become commonplace for startups. Many of these companies are still private, providing significant returns to their early investors while the general public misses out. For example, the tech landscape has seen numerous startups valued at over $1 billion, often referred to as “unicorns.”

In fact, companies like Uber delayed their IPO, choosing instead to raise funds privately. This trend has led to fewer companies going public; the number of IPOs in the U.S. has significantly decreased, from over 300 annually in the 1980s and 1990s to just around 100 recently. This shift indicates that wealth is increasingly concentrated among private investors, hedge funds, and accredited individuals, while retail investors are left behind.

The decrease in IPOs can be attributed to various factors, including:

• Increased regulatory scrutiny post-Enron and WorldCom scandals.
• The rising costs associated with being a publicly traded company.
• Greater access to capital in private markets, allowing companies to grow without going public.

The public is missing out on huge investment gains

With the introduction of the Sarbanes-Oxley Act in 2002, public companies face heightened regulatory demands, making the process of going public more expensive and complicated. While these regulations aimed to protect investors from corporate fraud, they inadvertently restricted access to lucrative investment opportunities for the average person.

As a founder of a small media company, I can attest to the allure of private investments. If I can raise $1 million from private investors with minimal effort, why would I subject my company to rigorous public scrutiny? The reality is that many entrepreneurs prefer to remain private, benefiting from a more flexible capital-raising environment.

For prospective investors, this means that:

• Many companies will wait longer before going public.
• Retail investors may miss out on significant early-stage growth.
• Founders and early employees often cash out at IPO, leaving public investors with the risk of buying into a mature company.

Private market is king – being accredited gives you access

To tap into the wealth-generating potential of private markets, individuals must meet the criteria to become accredited investors. The requirements typically include:

• An income of $200,000 for individuals or $300,000 for married couples.
• Having a net worth exceeding $1 million, excluding the primary residence.

These requirements serve to ensure that investors have a certain level of financial sophistication and can bear the risks associated with private investments. However, they also create a barrier that keeps many potential investors at bay. The government’s regulations often serve to maintain the status quo, allowing the wealthy to accumulate even more wealth.

As a seasoned investor with experience in both public and private markets, I’ve seen the shift towards private investments firsthand. Companies that once went public at relatively low valuations are now seeking to maintain their private status for longer, reflecting a new reality where fewer companies choose to face the challenges of public listings.

The path to becoming an accredited investor

Many individuals may feel that the path to becoming an accredited investor is daunting. However, various industries offer six-figure salaries, and with strategic planning, many can reach this status. Alternatively, some individuals may have access to wealth through family connections or partnerships. Here are some practical steps:

1. Consider pursuing high-paying careers in finance, technology, or healthcare.
2. Network with successful individuals who can provide mentorship or partnerships.
3. Engage in entrepreneurial ventures that could yield significant returns.
4. Utilize resources aimed at educating and guiding individuals toward financial independence.

For those unable to meet the accredited investor requirements, investing in public equity markets remains a viable option. While it might not offer the same high returns, the transparency and liquidity of public markets can still benefit diligent investors.

Don't need to be accredited to invest in private growth companies

While accredited status can unlock many doors, it is not the only path to investing in the burgeoning field of private growth companies. Platforms such as Fundrise Venture allow individuals to invest in a diversified portfolio of startups without needing accredited status.

These platforms typically focus on high-growth sectors, such as:

• Artificial Intelligence & Machine Learning
• Modern Data Infrastructure
• Development Operations (DevOps)
• Financial Technology (FinTech)
• Real Estate & Property Technology (PropTech)

With low investment minimums, such as $10 for Fundrise, this approach democratizes access to private investments and allows more individuals to participate in the potential upside of the next big tech innovation.

Track your wealth

Understanding your financial position is crucial for successful investing. Tools like Empower offer free platforms that aggregate financial accounts, providing insight into your net worth and spending habits. This visibility helps investors make informed decisions.

Prior to using such tools, managing multiple accounts can become cumbersome. Empower simplifies this process, allowing users to:

• Monitor investment performance across various asset classes.
• Analyze portfolio fees to identify hidden costs.
• Utilize advanced retirement planning calculators based on actual data.

About the author

Sam began investing in 1995 after opening an online brokerage account. His passion for investing led him to a career in finance, working for notable firms such as Goldman Sachs and Credit Suisse. With an MBA from UC Berkeley focused on finance and real estate, he became a Series 7 and Series 63 registered investor.

In 2012, Sam retired at 34, largely due to generating passive income from his investments. He now dedicates his time to playing tennis, spending time with family, consulting for fintech companies, and helping others achieve financial freedom through his writings.

Sam is also interested in real estate crowdsourcing, providing opportunities for those who may not have the means to invest directly in property. For those looking to explore this avenue, Fundrise offers accessible options in real estate investments.

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