Accredited Investors: Definitions & the Pool of Startup Capital
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the Securities and Exchange Commission (SEC) to review in 2014 the definition of an accredited investor in 2014. The SEC is thus currently analyzing the balance embodied in the definition in terms of investor protection, the public interest and the economy.
Currently, an individual accredited investor is defined as someone with $1 million in net worth excluding the value of a primary residence, or annual income of $200,000. The Angel Capital Association (ACA) has issued a statement of concern about the SEC possibly raising these financial thresholds based on inflation. The ACA’s “Protect Angel Funding” initiative is calling the startup ecosystem to action to urge SEC regulators to preserve the current quantitative definition of who qualifies as an accredited angel investor.
Based on SEC and General Accounting Office calculations, inflation-based SEC adjustments supported by fraud protection organizations could reduce the pool of angel money by as much as 60 percent. Such adjustment would increase the net worth standard to about $2.5 million and annual income to $450,000.
“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,” said David Verrill, chairman of ACA, in recent public comments.
The Center for Venture Research at the University of New Hampshire has documented that in 2013 accredited angel investors directly invested $24.8 billion into nearly 71,000 early-stage companies. The ACA highlights that accredited angel investors provide 90 percent of outside equity capital to startups, on top of mentoring and often additional expansion capital.
Addressing concerns about the level of protection to investors Marianne Hudson, ACA’s executive director, explained that “the angel investment asset class has experienced very little fraud, because angel investors have strong processes for due diligence and investment terms, and ongoing entrepreneurial support”.
The ACA has expressed that it would be supportive of alternative, qualitative criteria, such as experience and “sophistication”. The latter is based on factors such as membership in an angel group, employment history, relevant investment experience, total liquid assets, or by limiting the percentage of net worth that could be invested in any single offering.
Outside the United States, policymakers and entrepreneurship supporters have been seeking to achieve a higher level of sophistication among its angel investors, by forming stronger angel investor networks. In response to this growing interest, the World Bank’s infoDev has developed a "how-to" guidebook for creating business angel networks in frontier markets.
Available resources that may of interest include:
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