Let’s Compare Apples to Apples: Accredited Investor Definition

By: Marianne Hudson, ACA Executive Director

Last week, Scott Shane wrote a column in Entrepreneur.com, Would a Higher Accredited Investor Threshold Clip Angels’ Wings? While the answer to that question to me is obviously “yes”, Scott concluded “data on the angel capital market’s response to the 2010 increase in the (accredited investor) threshold doesn’t support that view.”

I’ve read his column and traded an email or two with him since, and I have to say, Pardon Me?

Let’s clarify the issue.  ACA is concerned that the SEC might raise the thresholds for being an accredited investor sometime soon, which would significantly cut back on the number of angels and amount of capital available to startups. If the thresholds were raised for inflation, the thresholds for net worth and income would more than double from the current $1 million (not counting your house) and $200,000.

Two government agencies – the SEC itself and the General Accounting Office – both say that 60 percent of households would be eliminated from accredited investor ranks if $2.5 million and/or $400,000 were required. ACA researched this further and surveyed our membership nationwide. The result: 28 percent of ACA members would no longer qualify, with the greatest impact on regions outside of major capital markets like New York, Boston and Silicon Valley.

Scott asserts that a 2010 change to the accredited investor definition – which removed primary residence from the net worth calculation - didn’t result in a drop in the number of angel investors or the amount of money invested, so therefore this potential change in 2014 wouldn’t have an impact either (or that ACA’s concerns are overstated). His comparison doesn’t pass the apples-to-apples test in my mind.

ACA research hasn’t turned up a true percentage of individuals who lost their ability to invest based on that change (Scott estimates it is 25 percent and gleaning from a GAO report, 20 percent could be right), but I do know this: ACA was involved in the negotiation process in 2010 and we agreed to the home value compromise because we believed the impact would be minimal or cause the least damage of the many options discussed. Estimates of the angel market between then and now bear that out – there were more angels and more dollars invested in 2014 than 2010 (or adjusting for the recession, 2013 was better than 2007).

Who should you believe? I think angels, entrepreneurs and the startup support community should use their own common sense in considering Scott’s argument. Comparing a change based on home values versus doubling of income and wealth just don’t make sense to me. Home values and their connection to wealth and income are likely complicated and not always correlated. Not that net worth isn’t complicated too, but a doubling or more of the requirement is a much bigger deal and it is just common sense that many, many more investors would be lost from the angel world.

We encourage you to stay informed. One easy way is to listen to this recent radio show I did this week.

If you share ACA’s concerns about the potential change in accredited investor rules, please join us in our Protect Angel Funding campaign. Write to the SEC – we know they consider all input. We’ve got easy links and even templates on our site – but we encourage you to share your own ideas and experience too.