The SEC is considering changing the definition of accredited investor.
I am curious how readers of this blog would change it.
Here are my recommendations:
- First, don’t increase the financial thresholds. Increasing the financial thresholds would hurt the startup and early stage company ecosystem. Perhaps devastatingly. Plus, apparently there have been no studies of the potential economic impact of increasing the financial thresholds. We should not act without knowing the likely economic consequences of our actions.
- Second, allow persons who do not meet the financial thresholds but who meet a sophistication test to qualify. For example, Certified Financial Planners, securities professionals, and other similar persons.
- Third, add proportionality.
By proportionality, this is what I mean:
- Allow people who do not otherwise meet the current income or net worth tests to invest up to 5% of their income or net worth in startups annually. So, for example, if you have a $500,000 net worth, you could invest $25,000 in startups per year.
Proportionality would improve the definition of accredited investor. Right now, if you are worth $999,999 and don’t meet the income test, you can’t invest anything in an all accredited investor offering. That doesn’t make sense.
Proportionality would also broaden the pool of investors. This would be a good thing.
Accredited Investor Definition: What Not To Do
Some groups seem intent on upping the financial thresholds no matter what. Apparently the idea is–since they haven’t changed since 1982 they must be “broken” and need to be “fixed.” This is simply not true.
In this regard, I loved what Georgia Quinn had to say:
What struck me the most in listening to the committee discuss the definition and its purpose, was that while it must have been said at least fifteen times that the definition “was broken” or “didn’t work,” no one provided an example of how it had failed or the harm being caused.
Other groups are concerned about senior citizens. If this is a concern, we can pass a special for persons about a certain age. Or ratchet up the thresholds as you get older. But don’t ratchet up the thresholds for everyone over concern about senior citizens.
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Thanks to Buzz Bruggeman, I had the good fortune to interview Dan Levitan of Maveron yesterday.
Again, thanks to Buzz, we filled the room.
Dan is a great public speaker, with really great things to say. If you ever get the chance to hear him talk, don’t miss it.
There were a number of things that Dan said that were really profound to me. I plan to blog about those later. But I wanted to share Dan’s book recommendations.
When I asked Dan what books he liked recently, he gave these three.
I have read Mindset, and that is a great book.
I haven’t read the other two, but I am going to put them on my list.
Thanks to everyone who came yesterday, and thank you Dan and Buzz!
I listened to the SEC’s Investor Advisory Committee hearing. I had the same reaction Georgia Quinn had, which she described in her recent blog post (which I recommend reading in its entirety).
What struck me the most in listening to the committee discuss the definition and its purpose, was that while it must have been said at least fifteen times that the definition “was broken” or “didn’t work,” no one provided an example of how it had failed or the harm being caused. Furthermore, one of the proposed “fixes” was raising the thresholds to $500,000 and $700,000 (with spouse) for income and $2.5 million in net worth, without citing any current harm or the potential detrimental effects of such a change.
I agree. I previously blogged some specific quotes from various members of the committee. It appears the committee is acting in the dark without sufficient information to make an informed decision. The committee should not make a decision at all to recommend an increase the standards until the economic consequences are well understood. To quote one of the new members of the committee again:
Could I just make a broader general point that I think is important for the staff. You know, this is an area where there’s a surprising lack of even basic…statistics… And it seems that if we want to do the best possible job for all participants in the process, for the companies that are offering securities pursuant to Reg. D, for the investors that are buying, and for the intermediaries in the market, it would behoove all of us to get some of this basic data. And the only way we’re going to be able to get it is unfortunately if the Commission rolls up its sleeves and does, you know, survey work in this area.
And then I really liked this quote:
In your comments you alluded to the fact that there could be an economic effect if there was a straight inflationary increase in the limits. I like to just second what Joe said about the importance of research. It would be good to do some economic research on what would be the effects if we made any changes at all on the economy; I think there would be some economic effects. I just want to say I think that the SEC tries to be diligent in these efforts but in general frequently in the dark about economic effects. I think it is important for the SEC to look at those kind of things. Here is a perfect example where we can do research, not just in the areas that Joe talks about, but in broader economic terms. I think that should be a strong part of the recommendations; we shouldn’t make changes unless we know what the effects are going to be or get a pretty good estimate of what they are going to be.
It seems absolutely critical that before the SEC acts they do an economic analysis of the impacts of increasing the financial thresholds.
The SEC Investor Advisory Committee met the other day. This was the Committee established by Dodd-Frank, to look out for the interests of investors. The meeting was closely watched because the committee is considering recommending changes in the definition of accredited investor. If the financial thresholds to be an accredited investor were adjusted to inflation since they were first set, about 2/3rds of all existing angel investors would no longer qualify. This would severely negatively affect the startup and early stage company ecosystem.
You can find a video of the proceeding here.
The discussion of the accredited investor issue starts at about the 44 minute mark.
The hearing is worth listening to. There were quite a few exchanges that stood out to me. Some of the transcript is below:
Dan has led many Maveron investments, including Seattle-based companies zulily, Trupanion and Cranium. He has directed a number of successful exits, including eBay (NASDAQ: EBAY), Potbelly (NASDAQ:PBPB), Auctionpay (acquired by Global Payments Inc. NASDAQ: GPN), Capella Education Company (NASDAQ: CPLA), Cranium (acquired by Hasbro NASDAQ: HAS), Quellos (acquired by Blackrock NASDAQ: BLK), Good Technology (acquired by Motorola NASDAQ: MOT), and Shutterfly (NASDAQ: SFLY). Forbes recently named him to its Midas List—the magazine’s annual ranking of the top 100 venture capitalists in the world.
If there was ever a time to explore the mind of an explosively successful venture capitalist, this is it.
The SEC is considering changes to the definition of accredited investor.
Some groups are advocating severe increases in the financial thresholds that would define out of the game about half of all angel investors.
The startup community is trying to make its voice heard by writing letters to the SEC.
If you want to write a letter to the SEC, all you have to do is the hit the button on the right hand side of this page which says “Submit Your Letter to the SEC.” Your letter would not have to be long. It can simply say: “Don’t increase the financial thresholds to qualify as an accredited investor. An increase in the accredited investor thresholds would be devastating to startup companies across America. Companies that create almost all of America’s new jobs.”
On April 10, 2014, the SEC issued Compliance and Disclosure Interpretations (“C&DIs”) on intrastate crowdfunding offerings. The guidance was overly restrictive, and risks really hurting intrastate crowdfunding just as it is getting going.
Here is what the SEC said: