A HISTORY OF ECONOMIC OPPRESSION
The economic foundations of the United States have always had racialized underpinnings, from colonizing Native American lands and the Pan-African Slave Trade to “redlining” (codified housing and home loan discrimination) and bias in student loans. During the “roaring 20’s,” America was grappling with demographic and economic shifts as immigrants and formerly enslaved Americans built successful, segregated communities. D.W. Griffith's 1915 film Birth of a Nation had revitalized membership in the terrorist group, the Klu Klux Klan. Jealousy and indignation sparked race riot massacres in thriving Black communities like Tulsa (1921) and Rosewood (1923). This decade, which was also marked by financial industry excesses and white-collar crime, culminated in the Stock Market Crash of 1929. The crash ushered in the greatest, and longest-lasting economic crisis of the 20th century, the Great Depression.
As President Franklin D. Roosevelt began carrying out his “New Deal” policies to stabilize the economy, he navigated appeasing his wife, Eleanor, who supported civil rights for women and Black Americans, Black constituents who ultimately left the GOP en masse to become Democrats, racist Southern Democrats who despised Black Americans, and wealthy campaign contributors. His politically advantageous strategy included concessions that benefitted the Black working class superficially (and temporarily). At the same time, his creation of key agencies, namely the National Recovery Agency (NRA, 1933), Home Owners Loan Corporation (HOLC, 1933), Federal Housing Authority (FHA, 1934), and Securities and Exchange Commission (SEC, 1934), anchored policies that both explicitly and implicitly suppressed wealth creation for Black Americans specifically for the remainder of the century and beyond. This led to a massive and growing wealth gap and put startups led by Black, Latinx, and female founders at a disadvantage, even though they are shown to outperform their all-White counterparts. The implicit nature of the SEC’s startup redlining has led many to believe (perhaps until recently?) that the lack of representation of underrepresented founders is a reflection of meritocracy, but deeper inquiry into the systemic nature of exclusion tells a different story.
THE SEC ROLE IN ECONOMIC APARTHEID
The Securities and Exchange Commission (SEC) regulates laws that govern how founders raise startup capital, who they can raise from, how, and how much. Current regulations segregate investors into two classes: "accredited" and "non-accredited." The SEC defines accreditation under Rule 501(a) of Regulation D by income ($200K per year individually or $300K for couples) and/or net worth ($1MM, excluding personal residence). Investors who don't meet SEC thresholds are restricted - sometimes barred - from investing in startup offerings. Certain offerings (i.e. Reg D 504) fall under states' "Blue sky laws," a "states rights" approach to securities governance.
Founders without a high net worth network (over-indexing as Black, Latinx, and female due to wealth and wage gaps) face separate and unequal offering regulations such as Reg CF (equity crowdfunding), which emerged under the JOBS Act. For founders, crowdfunding requires gatekeeper approval from registered crowdfunding portals, expensive audits that are largely irrelevant to pre-seed startups, fundraising limits, and annual SEC reporting. Crowdfunding is also stigmatized by institutional investors who recognize these disadvantages and often assume that any worthwhile startup would make a Reg D offering. For non-accredited investors, there are caps on how much they can invest per year, and all of the disadvantages that impact the company they are funding. This makes it hard for most founders to raise capital, but due to the wealth and wage gaps, it is especially hard for Black, Latinx, and female founders. It also makes it hard for non-accredited investors to achieve the kind of outsized returns that investing in private startups can generate.
TRUTH AND RECONCILING THE DEBT TO UNDERREPRESENTED STAKEHOLDERS
To do its part to dismantle economic apartheid, the SEC should amend the accredited investor definition to empower investors to self-certify as accredited by virtue of risk tolerance, sophistication, or access to sophisticated counsel. The latter could include lawyers, Certified Public Accountants, (CPAs), and advisors. This could be done with a digital attestation hosted on the SEC’s office of Investors Education and Advocacy (which could also include links to educational materials to enhance sophistication) . The attestation should disclose that private equity investments have total capital and liquidity risk, and ask investors to acknowledge awareness of and tolerance for an offering’s risk and illiquidity. This change would simplify and harmonize offering regulations while more efficiently facilitating capital formation and wealth creation for those disadvantaged by the current definition.
Just as redlining has been exposed, the criteria for individual investor “accreditation,” must be revealed as the vestige of systemic racism that it is, and dismantled in order to protect investors from further discrimination. The “Black Wall Street's” of Tulsa, Rosewood, and countless other black communities, demonstrate that investors, even those formerly enslaved, or one generation removed, can govern their own financial affairs if afforded the opportunity. To delay fully democratized access to the private market any further defies both the overwhelming public interest in racial equity and the mandates that the Commission was created to steward. Furthermore, taking this step to level the playing field is essential to America’s economic recovery and sustainability.
This post is part of the Tech Funding Equity Project developed at the Aspen Tech Policy Hub. You can learn more about this project at: https://www.aspentechpolicyhub.org/project/closing-the-tech-funding-gap/