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Beyond the Pitch

Urgent Call to Action: SEC Definition Change Could Hobble Angel Investment

In the near future, the Security and Exchange Commission (SEC) will be revisiting the definition of accredited investor.

That definition determines who can be an angel investor and who cannot.

The Dodd-Frank Act of 2010 requires the SEC to examine this definition every four years to determine if it should be modified “for the protection of investors, in the public interest, and in light of the economy.” (The last review was when Dodd-Frank became law. At that time the exclusion of the primary residence provision was added.)

Currently, an individual accredited investor is defined as someone with $1 million in net worth, excluding the value of a primary residence or annual income of $200,000.

Under consideration is whether these financial thresholds should be raised arbitrarily based on inflation.

The SEC and the Government Accountability Office (GAO) estimate that under the “inflation” provisions net worth requirements could escalate to $2.5 million and annual income requirements could increase to about $450,000.

They further estimate that if the thresholds are raised, 60 percent of all accredited angel investors could no longer qualify to make angel investments.

The Angel Capital Association (ACA) surveyed members and learned that more than 25 percent of its 12,000 plus members would lose accredited investor status if net worth and income thresholds were raised.

Outside New York, Boston, and California the story is worse. Nearly one-third of ACA members would lose their accredited investor status, creating an even more challenging environment for acquiring investment capital.

Why is the SEC considering something that seems to make so little sense?

The input appears to be coming from consumer advocacy groups who are lobbying to protect the public against fraud—think swampland in Florida or desert in Arizona—from entities that are subject to the same accredited investor criteria.

The inconsistency, of course, is that the angel investment class has experienced very little fraud. Angels repeatedly demonstrate a strong process for due diligence, high standards of best practices, and a commitment to integrity and to helping entrepreneurs succeed.

So here’s the call to action. Every entrepreneur, investor, and person who believes that startup companies are the greatest source of job and wealth creation needs to contact the SEC.

The ACA has made it easy. Information and an easily adaptable letter and email template can be found on the ACA web site at

http://www.angelcapitalassociation.org/aca-public-policy-protect-angel-funding

 

The SEC appears willing to listen to alternate suggestions for accredited investor criteria. It’s up to us to make our voices heard….now.

  • I can confirm that in Ohio, where I practice, many investors would lose their accredited investor status if these revisions to the definition of “accredited investor” were ever implemented. Hopefully the threshold stays where it is.

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