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Redlining in Private Investment

Fortune Jan 10, 2021
This article is deemed a must-read by one or more of our expert collaborators.
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Redlining in Private Investment giving compass
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Giving Compass' Take:

  • Mariah Lichtenstern explains how SEC regulations that permit only the wealthiest Americans to invest in private markets resemble “investment redlining” by restricting the accumulation of wealth in communities of color.
  • How does limiting investment opportunities for lower-income Americans resemble the practice of redlining, which denied mortgages people of color and robbed them of the opportunity to accumulate wealth through homeownership in the first half of the 20th century? How can impact investing help to address these issues?
  • Read about the legacies of redlining that persist today.

In the 1930s, as laws were passed to exclude Black people from generating wealth through homeownership, racist investor regulations were created for the same purpose, with the Securities and Exchange Commission’s accredited investor rule curtailing wealth-building through securities.

Before a venture capital fund will consider investing money, founders are most often expected to raise a “friends and family” round. Until 2012, the SEC limited this fundraising to an issuer’s personal and professional networks. People who did not come from monied networks were largely left without options.

Then, the Jumpstart Our Business Startups (JOBS) Act came along. It allowed for investments to be offered broadly, beyond one’s network, but requires that all investors be “accredited.” To qualify under the latest definition, this means an investor must have made $200,000 per year individually or $300,000 in household income for at least the previous two years, have a net worth (excluding personal residence) of at least $1 million, or have one of very few professional designations.

Approximately 10% to 15% of American households qualify as accredited. Of those, only 1.3% are Black and 2.8% are Latinx. Statistics show that venture capital investment largely goes to the people who are already in the decision-maker’s network—most often “like them”—overwhelmingly white men. For someone whose networks are largely rooted in Black and Latinx communities, that means less than 1% of the people “like them” are allowed to invest freely.

The SEC says it maintains these rules as a way of “protecting” investors. Of course, regulations are important. Yet a person does not have to be accredited to invest in the stock market, with its complicated puts, calls, spreads, and other strategies.

The accredited investor rule needs to change because it reinforces the racial wealth gap and perpetuates income inequality. The laws as they stand are one more vestige of systemic racism we need to eradicate.

Read the full article about investment redlining  by Mariah Lichtenstern at Fortune.

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If you are looking for more articles and resources for Impact Investing, take a look at these Giving Compass selections related to impact giving and Impact Investing.

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    Giving Compass' Take: • Harvard Law School Forum on Corporate Governance and Financial Regulation discusses measuring effectiveness when it comes to impact investments that aim to meet the Sustainable Development Goals (SDGs). • Investors need to look beyond simply "aligning" with the SGDs and look at how systems are changing. Do we have the right tools to measure that progress? • Here's how digital technology can help us meet the SDGs. As responsible investment in its various forms makes increasing inroads into the investment community, the question of how such investors set their goals and measure their progress toward these goals is of ever greater importance. As to their financial goals, the answer is relatively clear: traditional investors integrating environmental, social and governance concerns into the security selection are seeking either competitive or enhanced returns, while investors with a philanthropic mission may be willing to accept concessionary returns or combine conventional investments with philanthropic activities. But what about their social and environment goals? Aside from vague statements about “doing good while doing well” or “investing in a better world,” how clearly have investors delineated their specific goals? And what metrics do they have to measure their progress toward these goals? Equally important, as increasing numbers enter the field what benchmarks can help answer the question: who is or is not doing an effective job?


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