Accredited Investor: Using the Series 65 to Become Accredited.
In late 2020, over lunch with a friend, Nathan Leung discovered an unexpected path to becoming an accredited investor – one that didn’t require the traditional $200,000 annual income or $1 million net worth. Thanks to a then-recent SEC amendment, he could qualify by obtaining certain financial licenses, including the Series 65.
“Being in Silicon Valley, you hear about these amazing investors who were the first checks into iconic companies,” Leung shared in a recent Capital Ideas podcast interview. “I always assumed you had to be really rich or already had an exit to be able to do that.”
Leung’s journey highlights both the possibilities and limitations of the SEC’s attempt to democratize private market investing. The process involved two major steps: passing the Series 65 exam and (according to SEC staff) becoming a licensed investment adviser representative.
Despite being a college student juggling other commitments, Leung prepared for the Series 65 using a combination of free resources and borrowed access to Kaplan’s test bank. He passed the exam in May 2021, but this was just the beginning. The real challenge came with the regulatory requirements.
To become a licensed investment adviser representative, Leung needed to register both an investment adviser firm and himself with the SEC. Unable to meet the standard $100 million assets requirement for SEC registration, he cleverly utilized the “internet adviser exemption” by committing to provide advice primarily through the internet.
Leung navigated the complex registration process by studying public filings of similar firms and following the SEC’s detailed instructions. “I did this as a college student, didn’t have that much money, so didn’t want to talk to a lawyer,” Leung explained. “I just filled out the form, sent it to the SEC, and hoped for the best.”
The SEC staff proved surprisingly helpful, providing specific feedback on missing information and guiding him through the process.
By July 2021, Leung had achieved his goal, becoming what he describes as “one of Silicon Valley’s youngest and poorest angel investors.”
Leung’s story perfectly illustrates the contradictions in current investment regulations. As he pointedly observed, “As a college student, I could accumulate $50,000 of student debt, carry tens of thousands of dollars on my credit cards, and bet without limits on anything from random number generator outputs to Japanese baseball, but I couldn’t legally give my startup founder friend $1,000 for their company.”
However, the story took an unexpected turn.
After 18 months of operation and two annual reports, the SEC’s San Francisco field office conducted a routine examination. While the examiners were polite and even expressed admiration for Leung’s initiative, they ultimately recommended he withdraw his registration, suggesting the investment adviser registration process wasn’t designed for those primarily seeking accredited investor status.
Despite this setback, Leung remains an advocate for thoughtful reform of accredited investor requirements. He expressed support for Senator Tim Scott’s proposed legislation that would create a dedicated, accredited investor exam.
However, Leung advocates for a nuanced approach to reform.
“I think investor protection is a worthwhile goal, and there are a lot of scams out there,” Leung noted.
He suggests targeted reforms that would enable startup employees to invest in their co-workers’ ventures or allow individuals to invest in businesses within their community or industry of expertise.
Leung’s experience demonstrates both the ingenuity of young entrepreneurs in navigating regulatory barriers and the continuing challenges in democratizing access to private market investments. While his particular path to accreditation was ultimately closed, his story highlights the ongoing debate about how investor “protection through prohibition” conflicts with broader access to investment opportunities.
For Leung, the experience provided valuable knowledge about markets and securities law that will benefit his future investment decisions. More importantly, his journey exemplifies the spirit of Silicon Valley that he admires:
“this cycle of people working together and then investing in each other… it’s a positive-sum environment where everybody roots for each other.”
Nick Morgan is President and Founder of ICAN, the Investor Choice Advocates Network, a nonprofit public interest litigation organization dedicated to serving as a legal advocate and voice for everyday investors and entrepreneurs. He was previously a partner in the Investigations and White Collar Defense Group at Paul Hastings law firm. Morgan previously served as Senior Trial Counsel in the SEC’s Division of Enforcement. Capital Ideas is a series created by Morgan and Dara Albright.