Are More or Fewer Accredited Investors Needed in the US? That’s a No Brainer….MORE!

By David Verrill, ACA Chairman and Managing Director, Hub Investment Group

The US Securities and Exchange Commission has been tasked (every four years by virtue of the Dodd-Frank Act) to review the thresholds of wealth and income that determine whether or not an individual is accredited “for the protection of investors, in the public interest, and in light of the economy”. The definition of accredited investor hasn’t changed a lot in several decades – a point of fact that has motivated many to say that by virtue of the cost of living increases alone over that time the levels should be roughly doubled to $450,000 in income and $2.5 million in net worth (not including your primary residence). While the logic of math is plausible, these increases address none of the reasons why accreditation should be changed – to protect investors, in the public interest, and in light of the economy. Let’s take a look at each of these.

  • To protect investors. There is almost no fraud in the angel and early stage investment space, so increasing the levels of wealth and income more than likely won’t reduce fraud. I get it that the SEC needs to focus on fraud. They are looking at a broad array of investment types in contemplating accreditation, including VC and PE funds, REITs, hedge funds, etc. Unfortunately there have been some devastating fraud cases in some of those worlds. However, let’s not throw the baby out with the bath water. Let’s address fraud where it exists, not where it doesn’t.

  • In the public interest. Controlling fraud is certainly in the public interest. And some might argue that investing in a risky space should be kept to those who can “afford to lose it all”. But let’s face it, the United States was built on innovation and entrepreneurship. Enabling those given rights is in the greatest public interest.
  • In light of the economy. This is where the debate is stopped dead in its tracks. What is the number one problem in our current economy? Jobs. Why is the JOBS Act one of the few bi-partisan bills to pass by a landslide in both the House and the Senate? Jobs. Angel investors provide upwards of 90% of all outside capital to innovative, high-growth startups that are responsible for most of the jobs created in our economy today. These startups depend on this funding and can’t get money from any other source – they have little to no collateral for banks to lend against, and venture capitalists have become ever more focused on later stage investments where they can put large sums of capital to work. Last year angels invested nearly $25 billion in about 70,000 companies. If the income and net worth thresholds were raised, more than half of the existing angel investors would no longer be accredited, and no longer able to invest in these companies. I am one of them. The pool of capital for these growing companies would take a major hit. Can our economy risk that hit?

We need more jobs in the US. We need more accredited investors to fund the startups that create the most new jobs and innovation in our economy. We need to speak up to encourage the SEC to keep the income and wealth requirements for accredited investors where they are. Even more, the SEC should add measures of sophistication such that more people can become “accredited” without meeting the current threshold levels of income and wealth. Angel investing in startups is an important investment class that more people – not just wealthy investors – should have access to. We need more accredited investors in the US – that’s a no brainer.

If you agree, please take the time to submit your comments to the SEC, before they publish their rules or related document. ACA makes it easy for you to do this, with letter templates to the SEC and more ways to share this information with your network in the startup ecosystem. You can find all of these – and how to submit them directly to the SEC - on ACA’s Protect Angel Funding web page.

(Editor’s note: The SEC has not yet published rules on the accredited investor definition. The Dodd-Frank Act asks them to publish their document as early as late July.)