At least once or twice per year, a prospective client will call with the greatest new idea—launch a venture fund for everyone. Open up potential fundraising by appealing to moderate-income people. Why hasn’t anyone thought of it before?
Of course they have, but at least since the 1930s, the regulatory regime in the US has been designed to prevent “risky” investment by those without sufficient financial sophistication as well as sufficient resources to endure a total loss of their investment. But in our view, protecting potential investors from risk may limit the potential for rewards.
As a result of the regulatory barriers, participation in venture capital has been the exclusive province of institutions, family offices, and a coterie of high-net-worth individuals able to satisfy the investor qualification tests embedded in federal securities law. Other investors have been sidelined because Rule 501 of Regulation D defined “accredited” status by income and net-worth thresholds that typical households did not meet.
But there have been some chips in the barriers walling off the general public. Against the historical backdrop, democratization refers to the gradual erosion of structural and regulatory barriers that have historically cordoned off the asset class from the broader investing public.
First, the income and wealth standards for “accredited investors” were established in 1982. The income requirements for a natural person investor ($200,000 for an individual, or $300,000 with that person’s spouse1) have not changed at all since then. At the time, those numbers presented a significant barrier—adjusted for inflation, they equate to approximately $668,000 and just over $1mn2, respectively, today—but in many parts of the country, those numbers are not that exclusive today. We believe this to be the most significant factor in democratization. This was tempered somewhat by the adjustment in 2010 of the accredited investor net worth standard (an alternate to the income standard) to exclude the investor’s primary residence, because real estate inflation had broadened the pool of accredited investors beyond its intended scope.
Second, in 2010, the SEC revised the accredited investor definition to include individuals with certain professional certifications and “knowledgeable employees” of the issuer, regardless of their income or net worth.
Third, the Jumpstart Our Business Startups (JOBS) Act of 2012 opened a pathway for equity crowdfunding under Regulation Crowdfunding and liberalized general solicitation under Rule 506(c). Under Regulation Crowdfunding, an entrepreneur can raise up to $5mn from non-accredited investors annually, and individuals can participate with a few hundred dollars. Still, Regulation Crowdfunding imposes onerous issuer disclosure obligations, annual reporting, and investment caps keyed to an individual’s income and net worth. Funding portals must register with the SEC and FINRA and adopt procedures to reduce fraud. These requirements, which are designed to protect investors, also increase costs and discourage Regulation Crowdfunding’s more general adoption.
Fourth, the 3(c)(1) Investment Company Act of 1940 exclusion was broadened for “qualifying venture capital funds” raising not more than $12mn in commitments (increased from $10mn in August 2024) to permit 250 beneficial owners, rather than 100. But a $12mn venture fund is very small. We believe this change would be truly useful only if the fund size were increased to at least $50mn.
While all of these regulatory and unintentional inflationary amendments have helped broaden opportunities for the investing public, they have not significantly shifted the landscape. The impetus for meaningful change may need to come directly from public appeals to the regulators; or perhaps the threshold, rather than being primarily financial, should instead reflect solely investment knowledge and sophistication.
Reprinted with permission from Preqin. Copyright 2025 Preqin. All rights reserved.
1 In each of the prior two years, and with reasonable expectation of the same for the current year.
2 Inflation adjustment based on CPI Inflation Calculator (1982 to 2025): https://www.in2013dollars. com/us/inflation/1982?amount , accessed as of July 6, 2025.
