Angel Insights Blog

By: Michael Cope, Founder of Cope Ventures 

Editor’s note: Michael Cope is a Dallas-based angel investor, mentor, and serial entrepreneur. He recently shared with ACA his letter to the SEC on potential changes to the accredited investor definition. He has compelling thoughts, and wanted others in the startup ecosystem to consider it as an example of letters they could write on this important topic.

The Honorable Mary Jo White, Chairman

US Securities and Exchange Commission
100 F St. NE
Washington, DC 20549

RE: Accredited Investor Definition

Dear Chairman White:

I am an independent Angel Investor and have been so for nearly 20 years, with multiple good exits under my belt. I earned the money that I invest by founding a business in 1974, operating it for 20 years including taking it public as a NASDAQ company in 1984. Since “retiring” in 1994 I have been involved in numerous early stage companies and helped many start ups get off the ground and on to success. I think I can be viewed as someone that the SEC, and the country in general, WANTS to see as an active Angel investor. Since my net worth is well above any threshold the SEC might set as a minimum to qualify as an Accredited Investor, I am not writing to protect myself, but rather to protect my numerous colleagues who are qualified based on their skill sets to judge the risks in early stage investments, and who have amassed more than $1M in net assets (not counting residential holdings) but may not have the $2.5M mark yet.

As an active member of the relevant community I can tell you that way more than half of the active players in the Angel investing community would be at risk of falling below this threshold in any given year, perhaps starting the year as qualified but due to market fluctuations finding themselves as not qualified at some point in the year. And I can also tell you that it is exactly this group, way more than the super wealthy, that steps up to taking measured and prudent risks in investing in their own future. They are the ones who seek to do something big and meaningful, and if they have become millionaires they have proven that they aren’t stupid. They don’t need to be “protected from themselves”. They have earned the right to take risks with significant upside potential. The stock market is no longer the place to do that. Early stage company investment is now the place where significant growth in wealth is possible. It is not only counterproductive, it is simply not right to unduly limit who gets to participate, particularly when their skill sets and experiences (not just their net worth or income level last year) show they are qualified to judge the risks.

I am not arguing that the general public doesn’t need protection from Con men, or there should be no minimum threshold, but rather that the $1M mark is still more than adequate to filter out those that may need to be “protected from themselves”. The other thing to consider is that the size of the group of “actual investors” which fall into the $1-2.5M category is so large that the pool of Angels who really “should be” investable would fall so precipitously that the early stage companies that rely on this group will fail to become capitalized….ie way too many companies will wither and die as a result. When you couple this with the simple fact (and in my mind THIS is the OVERWHELMING FACT) that there is very little evidence of this particular segment having been defrauded, it tells me that raising the threshold is an attempt to fix a problem that basically doesn’t exist, but in doing so creates a problem that wasn’t there before the fix….namely drying up the source that drives innovation and jobs creation. This is surely not the intent of the SEC, but it is very likely to be the result if the threshold to define an Accredited Investor is raised beyond where it is now.

The Angel community, including this critical segment, is both skillful and smart, and generally does a good job of vetting their deals. There is very little successful fraud in this segment. Don’t fix a problem that doesn’t exist, and in the process create a real and toxic problem. And if you want to actually IMPROVE the definition of who is an Accredited investor you should not do it by raising an arbitrary number but rather by seeking information as to the experience and sophistication level of the investor as an alternative way to qualify.

There is one other potentially toxic SEC related problem that must absolutely be avoided if early stage businesses are to thrive or even exist. The idea that a start up company could find itself with a virtual death sentence because of one of their investors tripping (accidentally or purposely) into violation of these rules regarding fund raising, is so toxic that it could choke off the entire innovation movement. I speak from experience that not everyone has. Those who really drive innovation have personality types that tolerate, and even thrive on, all kinds of risks that most folks would find terrifying, but can not tolerate the risk that some bazaar rule or government agency might shut them down for things outside their control. Don’t overlook the fact that the culture of creativity and innovation can be killed. Please prevent these threats of extreme penalties, essentially death penalties for start up companies, for technical violation of fund raising rules from coming to pass, or you can truly kill this country’s golden goose.

I have not written one of these letters in a very long time. I do this because I believe we as a nation are making some very important decisions about things I know something about and I, frankly, sometimes wonder whether those making the decisions have the background to fully understand the impact of these decisions. I wanted to share what ever insights I may have with someone in a position to put them in perspective. I appreciate you taking the time to read my comments and suggestions.

Sincerely,

Michael Cope