Elevate your enterprise data technology and strategy at Transform 2021.
The Securities and Exchange Commission will review the definition of an “accredited investor” this year, and people in the angel investor community are worried that a new definition would disqualify many would-be and current angels.
Right now, the SEC defines an accredited angel investor as “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase” or “a natural person with income exceeding $200,000 in each of the two most recent years.”
The government originally set these thresholds to make sure that investors are of a certain experience level to go into investing with eyes open. Investing in private companies, the reasoning goes, is fraught with risk and characterized by low transparency and high investment costs — no place for the “unsophisticated” investor, as the regulators put it.
The current thresholds have been in place since 1982. In 1982, just 1.3 percent of households qualified for accredited-investor status, compared with 9.04 percent today, according to Investor News.
Section 413 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires the SEC to review its definition of an accredited investor in 2014 to determine whether it should be modified “for the protection of investors, in the public interest, and in light of the economy.”
The SEC and the General Accountability Office (GAO) estimate that an adjustment, if made, would move the net worth threshold up to $2.5 million and the annual individual income number up to $250,000.
Such an adjustment, the Angel Capital Association believes, would eliminate “about 60 percent of current accredited investors.” Thus, a lot of potential seed money for startups would go away, the ACA believes.
“Imposing higher financial limits on who may qualify as accredited would be devastating to angel investing, the startup economy, and job growth that depend on it,” says ACA chairman David Verrill in a statement Tuesday.
But how could financial thresholds set in the Reagan Era still be valid today? I asked ACA executive director Marianne Hudson that question, and she answered me with another question: “How do you argue that that number was right to begin with?”
The feds shouldn’t worry so much about angels being defrauded anyway, she says. “In terms of angel investments we’re just not seeing that much fraud.” Hudson says that the state agencies that track investment fraud often report cases of people being duped in real estate or energy-related investment schemes, but seldom report cases where angel investors were defrauded by startups. She points out that all of these types of investment, and many more, are covered under the same SEC investment rules.
The ACA has launched a “Protect Angel Funding” campaign to convince the SEC to keep the financial definition of an accredited angel investor the same. The campaign consists mainly of the ACA providing letter templates to its members, which they can then send to the SEC.
The ACA’s opponents in this issue include the North American Securities Regulators Association, the American Association of Retired Persons (AARP), and Americans for Financial Reform.
The SEC may be looking for a solution that will make everybody happy. It has recently begun to talk about other ways to qualify angel investors for accreditation. The SEC might consider the experience and sophistication of an investors based on factors such as membership in an angel group, employment history, relevant investment experience, or total liquid assets. They may put a limitation on how much an individual investor could invest on any one offering, measured by a percentage of the investor’s net income.
We’ll keep an eye on this as the SEC considers its decision.
VentureBeatVentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative technology and transact. Our site delivers essential information on data technologies and strategies to guide you as you lead your organizations. We invite you to become a member of our community, to access:
- up-to-date information on the subjects of interest to you
- our newsletters
- gated thought-leader content and discounted access to our prized events, such as Transform 2021: Learn More
- networking features, and more