Since 1982, the SEC has defined an "accredited investor" as someone with $1 million sitting around collecting dust or annual income of $200,000 in each of the previous two years with the reasonable assumption of making at least $200,000 in the year ahead.
In 2006, Chris Cox wanted to bump that up to $3 million, mainly because a lot of hedge funds suck and he didn't want, say, a giant, global economic collapse just because investors are dumb and will put their money anywhere. Oops.
Now, Dodd Frank requires the Commission to revisit accredited investor rules again “for the protection of investors, in the public interest, and in light of the economy," and some folks are concerned raising the bar on what qualifies as "accredited" might discredit many current angels who make it rain on startups:
The Securities and Exchange Commission will review the definition of an “accredited investor” this year, and people in the angel investor community are worried that a new definition would disqualify many would-be and current angels.
Right now, the SEC defines an accredited angel investor as “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase” or “a natural person with income exceeding $200,000 in each of the two most recent years.”
The government originally set these thresholds to make sure that investors are of a certain experience level to go into investing with eyes open. Investing in private companies, the reasoning goes, is fraught with risk and characterized by low transparency and high investment costs — no place for the “unsophisticated” investor, as the regulators put it.
The SEC and GAO estimate that a rule change would bump the current minimum up to $2.5 million and the annual individual income number up to $250,000. The Angel Capital Association believes that could disqualify up to 60% of currently qualified accredited investors.
So much for the Kitten On Demand startup I was trying to fund…