Dodd-Frank Rears its Ugly Head

This post was written by ACA Board Member, Catherine Mott.

What is happening behind the scenes in Washington? Could angel investors be cut off at the knees? Will the number of net job creators be cut to 1/3 of its current count?

Most of us are aware of the background: Section 415 of the Dodd-Frank Act (2010) required that Congress study criteria in 2013 to determine whether changes should be made to accredited investor definitions. This might include raising the financial thresholds (or recommending other criteria) to qualify for accredited investor status for eligibility to invest in private placement securities.

The General Accounting Office (GAO) is currently conducting this study (to be released in July) and has interviewed a few members of the ACA. We’ve heard some rumors that the GAO will be pressured by NASAA (North Am. Securities Administrators Assoc) to raise the income and net worth thresholds to qualify as an accredited investor. If they do recommend raising the criteria and Congress or the SEC complies, then the new standards could lead to a loss of the majority of angel investors in the U.S. market.

NASAA once again wants to raise the criteria to account for inflation since the 1980s, with some estimating income criteria from $200K to $450K annually, and raise the net worth standard from $1 to $2.5 million. An analysis of this data by a 2007 academic study found that about 60 percent of angels in angel groups would not meet the new threshold.

Isn’t this in conflict with the intentions of the JOBs Act, created to provide entrepreneurs with more access to capital?

The reality is that changes would hurt a majority of America, as making $200K per year in Pittsburgh (a Tier 2 City) is like making $450K in NY or LA (a Tier 1 City). Angel investors are located in every state, thus, entrepreneurs that are NOT located in large Tier 1 city would not have the access to capital they need to get their company off the ground.

Additionally, we all know that startups and angel capital are more important than ever. In today’s stalled economy, the jobs that come from NEW firms are critical to America’s vitality. A Business Dynamics Statistics Briefing validated this with data demonstrating that ALL NET NEW JOBS over a 25 year period came from companies 5 years old or less!

Who is funding these companies? Certainly not the banks – because young companies generally don’t meet the criteria needed for loans. It is the local angel investors who are taking the risk and are funding, to the tune of approximately $22.9 Billion in the U.S. market and 67,030 new firms in 2012, according to research by the University of New Hampshire’s Center for Venture Research. Let’s do the math: eliminating 60% of the angel investors by raising the accreditation standards equates to eliminating 40,218 startups. This might be oversimplifying the math, but the point is, it doesn’t take a doctorate degree to understand that when the well dries up, less people get to drink.

Raising the standards and increasing the difficulty for access to private capital is impractical when our economy needs more stimulation for job creation, not less.

Why would Washington consider cutting the growth of our economy?

Catherine Mott is the an ACA Board Member, as well as founder and CEO of BlueTree Capital Group and BlueTree Allied Angels. Catherine is the past Chairman of the Angel Capital Education Foundation, an organization that researches angel capital, tracks angel capital, and provides education to bring professionalism and ethics to the industry. In July 2010, she was named Chairman of the Board of the Angel Capital Association, the professional trade association for Angel Networks and Angel Funds in the U.S. In September 2011, Catherine was one of 21 individuals selected for the SEC Advisory Committee on Small and Emerging Companies.


Is ACA in discussions with NASAA on this topic? Also, if GAO decides to raise the standards, any idea what the timeline might be? Good luck!
- Knox Massey (Atlanta Technology Angels)  9 years ago 
As a speaker at a recent event I attended pointed out, anyone over 21 can walk into a casino and plunk down $10,000 on red or black. In view of that, do all these restrictions on angel investing make sense?
- Ben Goldberg (Mid-Atlantic Angel Group Fund I)  9 years ago