Tuesday December 3, 2013 0 commentsFrom Helsinki to Des Moines, an increasing number of startup businesses are raising money from individual private investors known as angel investors. Angel investing has been rising in popularity, but in the U.S., most angel investments are open only to accredited investors (individuals with a net worth of more than $1 million, or an income of at least $200,000 as an individual or $300,000 combined).
The Securities and Exchange Commission enacted this policy in 1933 to protect individuals who could not afford to lose the money they were investing. Eighty years later, this policy is still in place. It was strengthened both in 2010 when the SEC began to require investors to exclude the value of their primary residence in their net worth calculation, and in September of 2013 when startups participating in general solicitation offerings became required to take reasonable steps to verify investor accreditation.
In a country far different than it was in 1933, is accreditation still necessary?
I really don't think so, and here are just a few reasons why:
1) Information is everywhere: In 1933, investors had to rely on their own personal network and the company offering the securities to understand the risks of angel investing and the specific investment. Today, we have professional trade organizations like the Angel Capital Association, local and national angel groups, and a wealth of information on the Internet to educate angel investors.
2) There are equally risky investments open to unaccredited investors: Angel investing is extremely complicated and risky. However, if unaccredited investors can invest in penny stocks, purchase lottery tickets and gamble as much as they want in Vegas, shouldn't they be able to invest in startups?
3) Accreditation does not measure fiscal responsibility: Savings rates are positively correlated with income levels, but, as evidenced by the fact that former NFL players and lottery winners are far more likely to declare bankruptcy than the general population, income level doesn't necessarily correlate with fiscal responsibility.
4) Angel investing is entertaining and rewarding. I love angel investing for many reasons, but most importantly because it is an opportunity to invest in people who are so passionate about what they do, they will stop at nothing to make it happen. This is incredibly rewarding and because I love it so much, I prioritize it over vacations, new cars and home improvements. If people would rather engage in the rewarding activity of angel investing than go on an exotic vacation, they should have the right to do so.
5) It penalizes people for paying off their mortgage. Because the investor accreditation net worth standard excludes the value of the primary residence, it can actually deter people from paying off their mortgage. Take me for example. I qualify as an accredited investor based on my net worth, but if I paid off my mortgage, my accreditation would be at risk if we faced a future market downturn. Considering the fact that I live in Boulder, Colorado, one of the strongest housing markets in the country, my money is probably safer in my house than in the stock market. I am paying mortgage interest just to make sure I can continue to pursue my passion as an angel investor.
For those reasons and many more, I hope the SEC rethinks its policy for requiring investor accreditation. What do you think?