Is The SEC Going To Destroy Angel Investing?

Earlier this year, after the enactment of the Dodd-Frank financial regulatory reform bill, Doug Cornelius, who has a great blog, Compliance Building, speculated darkly about the future of angel investing. He wrote, “I expect the SEC is going to continue to be aggressive in establishing the new [accredited investor] standards.”

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard.  At least that’s my guess.

The Angel Capital Association had this to say about what adjusting the thresholds based on the inflation rate since the financial thresholds were originally set could mean:

[T]his…could result in the elimination of as many as 77 percent of all accredited investors who invest directly in start-up and early-stage small businesses.

The SEC is currently soliciting comments on its web site about the accredited investor standard, and it intends to propose rules to revise the standards in early 2011. As Bill Carleton reminded us just the other day:

The SEC is planning to propose rules on the accredited investor standard at the beginning of 2011. And the SEC is now seeking, and publishing, input online. See this web form. And see the comments received so far.

I agree with Doug that we should expect the SEC to aggressively raise the accredited investor requirements. If you read the Dodd-Frank bill, it pretty clearly expresses an intention on the part of Congress to raise the thresholds and puts an emphasis on the protection of investors. Sure, there is some language about acting “in light of the economy,” but this is language that is intended to be more of a brake on the direction Congress is pushing here. The direction the Dodd-Frank bill pushed toward is to making it more difficult to be an accredited investor. Why? I can only imagine that the thinking must have been that it was too dangerous to allow individuals to make investment decisions on their own that were not traditional or institutional investment vehicles.

Here is what the Dodd-Frank bill actually says: The SEC may

undertake a review of the definition of the term ‘‘accredited investor’’, as such term applies to natural persons, to determine whether the requirements of the definition, excluding the requirement relating to the net worth standard described in subsection (a), should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.

And, the SEC may:
Upon completion of a review under [described above], the Commission may, by notice and comment rulemaking, make such adjustments to the definition of the term ‘‘accredited investor’’, excluding adjusting or modifying the requirement relating to the net worth standard described in subsection (a), as such term applies to natural persons, as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.

It appears that the SEC is following these steps. It is soliciting input right now, undertaking a review of the accredited investor standard, and it appears it has already decided to issue rules making adjustments to the standard, early next year.

We need Congress to wake up and realize what is widely understood in the startup community. It is young companies that create all the job growth in this country, and it is critical for young companies that they be able to raise money. The last thing we ought to be doing is raising the accredited investor thresholds. In fact, I believe we should substantially lower the thresholds. Creating jobs and making it easier for startups to raise money should be our priority.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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