Who Can Be an LP?

I typically avoid writing about regulations and other forms of non-voluntary exchange, preferring to focus on value creation, but this one is worth highlighting.

Today, investing in VC or PE is restricted to accredited investors — those individuals with a net worth over $1M or an annual income above $200K (these values were set in 1982 and never adjusted for price inflation; what was $200K then is over $600K today). So, as we can see, like most non-technical regulations, these thresholds are arbitrary and subjective.

The underlying premise is that wealth equates to financial sophistication and risk awareness. Yet ironically, there’s no such restriction on financially unsophisticated individuals betting their savings in Las Vegas or jumping on the latest meme coin craze.

It’s true that private market investments come with limited liquidity, scarce information, opaque valuations, and long-time horizons. But assuming that “non-wealthy” individuals are incapable of making sound economic decisions — while still trusting them to vote — is a clear case of technocratic hubris. Just look around your own network: you will find wealthy individuals lacking financial sophistication, and vice versa.

To correct the notion that only wealthy individuals are financially sophisticated — and therefore eligible to become LPs in VC and PE funds — Congress passed a bill on July 21 directing the SEC to revise the definition of an accredited investor, allowing anyone who passes a federally approved exam to qualify, regardless of net worth and income.

While it’s a step forward, the new approach still rests on the paternalistic belief that individuals are inherently incapable and in need of government protection.

In the end, I believe the impact on VC will be minimal: few non-wealthy individuals are likely to take the time to pass the exam, minimum investment thresholds for VC funds remain high, and retail interest tends to focus on secondary shares of well-known unicorns — not on primary investments in early-stage startups, which the bill intends to promote.

Conclusion

The core lesson of Bastiat’s 1850 essay “That Which is Seen, and That Which is Not Seen” will never be learned by politicians and technocrats; in their hubris, they will always ignore what is not seen.