Proposed New Restrictions Threaten Opportunity for Middle Class Investors

Photo Credit: Getty

While President Biden and Congressional Democrats have called for reining in big firms through antitrust and other punitive policies, a tax provision contrived by Congress would cripple startups to the benefit of the big guys.

Under a list of “pay-fors” put forth on Sunday, September 12, by Democrats on the House Ways and Means Committee, entrepreneurial firms too small to afford the costly regulatory burdens of being a public traded company would no longer be able to secure funding from IRAs. And middle-class investors, who were just recently allowed to invest in these startups thanks to liberalized rules, would be locked out of building wealth in these companies through their retirement plans.

Section 138312 (see attached screenshot) of the draft bill issued by Committee Democrats bars IRAs from investing in virtually any company that isn’t publicly traded on an exchange such as NASDAQ or the New York Stock Exchange. Under Securities and Exchange Commission (SEC) rules, these securities are available only to “accredited investors,” which, since 2010, the SEC has defined as investors having a net worth of at least $1 million, excluding the value of a principal residence, or an income of at least $200,000 a year or $300,000 with a spouse. Late last year, at the urging of CEI and other free market groups, the SEC added a third category of non-wealthy professionals, including brokers and registered investment advisers, to the “accredited investor” category that could legally invest in private securities.

But the new Ways and Means bill bars both wealthy and non-wealthy investors from putting non-“accredited” investments in their IRAs. Under Section 138312, an IRA is barred from holding any asset for which the investor must have, under SEC rules, “a specified minimum amount of income or assets, … a specified minimum level of education, or … a specific license or credential.”

This will cut billions in funding for innovative startups in the U.S. As CEI adjunct fellow Paul Jossey noted in CoinDesk, in 2019, accredited investors “raised $1.5 trillion and outpaced the public markets,” and there is good reason to believe that a substantial portion of that seed capital was from IRAs.

Numbers are hard to come by, but many IRA custodians connect accredited investors to startups, and many startups that have gone on to become large companies have gotten their seed capital from IRAs. As I wrote in Forbes a few years back, venture capitalist Peter Thiel, the first outside investor in Facebook, invested in the early stages of the company’s growth partially through his self-directed IRA. Similarly, Max R. Levchin, who co-founded PayPal with Thiel in 1998, utilized his IRA to become one of the first private investors in the social media review site Yelp.

The Thiel example, in fact, was recently pounced upon by ProPublica as an example of the rich using their IRAs to grow richer. But under the provisions of this bill, the rich could still grow richer; they just couldn’t use their riches to help startups that could create thousands of jobs and improve lives. Would it really be more progressive to force accredited IRA holders to invest in publicly traded big banks or big tech companies, or stocks traded on foreign exchanges that will still be eligible to be held by IRAs? And why is the bill shutting the door to new middle-class investors with credentials, who can invest in private stocks for the first time?

It’s almost like those who drafted this bill don’t want us to “build back better.”