Private funds are an integral part of the financial landscape, offering unique investment opportunities beyond the reach of retail investors. However, these investment vehicles are not without constraints. That is why Sweater unlocked a new asset class for retail investors: Public VC Funds. Sweater’s platform allows partners to raise venture capital funds from an unlimited number of accredited and non-accredited retail investors leveraging our all-in-one solution from capital raising to capital deployment.
In this series, Navigating Beyond the Boundaries of Private Funds, we explore the constraints of private funds and how Sweater’s Public VC Funds are the answer to tap into non-accredited investor demand for alternative investments.
Let’s first delve into one significant constraint of private funds – the limit on the number of investors – and explore the key role accreditation plays in this limitation.
Limit on the Number of Investors
Private funds operate under a restricted model when it comes to the number of investors they can accommodate. Unlike Public VC Funds, which can have an unlimited number of investors, private funds are subject to stringent regulations limiting their investor base to 2,000 investors or fewer. It is argued that this limitation is imposed to preserve the essence of private offerings and to mitigate potential risks associated with a larger, less sophisticated investor pool.
The Securities and Exchange Commission (SEC) sets these restrictions to maintain a balance between investor protection and the flexibility offered to private fund managers. The idea is to ensure that private funds cater to a relatively small, more sophisticated group of investors who are presumably better equipped to understand and bear the risks associated with these investments.
However, the cap on the number of investors severely limits the capital inflow, potentially hindering a fund's ability to scale and diversify its investments. The exclusivity of private funds leads to missed wealth-building opportunities for investors who do not meet accreditation criteria, limiting their access to potentially lucrative investment opportunities. That’s where Sweater comes in. Sweater enables private market investing using public fund infrastructure.
Public VC Funds, like Sweater’s own Cashmere Fund, don’t leverage equity crowdfunding or SPVs but use a decades-old structure called an 'Interval Fund' similar to a mutual fund. These funds are publicly registered with the SEC.
A cornerstone of private fund investment is the concept of accreditation. Accredited investors are individuals or entities that meet specific financial criteria that qualify them to participate in private placements. The SEC defines an accredited investor as someone with an annual income exceeding $200,000 (or $300,000 for joint income) for the last two years with an expectation of the same income in the current year or a net worth exceeding $1 million, either individually or jointly with a spouse.
The accreditation requirement was designed to act as a gatekeeper, to ensure only investors with certain financial acumen and risk tolerance gain access to private funds. Accreditation rules were established a century ago in 1933, during the Great Depression. In the years leading up to establishing the law, the government may have had good reason to believe novice investors and the general public didn’t have the knowledge or experience to thoroughly evaluate an investment – at the time, less than 30% of the population graduated from high school.
But that’s no longer the case.
91% of Americans between ages 25-30 have graduated high school or obtained a GED as of the last US census in 2020. Over 58% of the population in 2020 have at least an associate degree. The government’s original argument that the general population does not have the knowledge or experience to thoroughly evaluate an investment is simply no longer valid a century later. Beyond educational status, vast amounts of knowledge and financial resources are available to the general public in ways unthinkable in 1933.
Today, the 97% of U.S. households that are non-accredited can now have access to venture capital for as little as $500 through Sweater’s Public VC Partner Program.
By breaking down the barriers of entry, Sweater's platform empowers partners to launch their own Public VC Funds to accredited and non-accredited investors. Partners can leverage our all-in-one solution from capital raising to capital deployment. We offer turnkey fund management, from fund launch to full fund operations, using our modern tech stack and APIs to make venture capital seamlessly accessible to the mass retail market. The unlimited number of investors and the elimination of strict accreditation criteria allow a broader and more diverse group of individuals and institutions to tap into the world of alternative investments.
Using Sweater’s platform, partners can transform how non-accredited households invest ensuring that opportunities are no longer limited to a privileged few but are available to all investors, ushering in a new era of financial empowerment.
For more information regarding Sweater’s Public VC Funds or to contact our team, please click here.