The SEC itself and Government Accounting Office found that a change in the accredited investor definition to reflect inflation which some advocates are supporting to $450,000 in income or $2.5 million in net worth would eliminate 60 percent of the households that currently qualify as accredited investors. The Angel Capital Association, the trade group representing 12,000 accredited investors has conducted a survey which confirms this, also finding that the impact would be higher in the country's interior.
Proponents of change in the accredited investor definition argue higher limits will eliminate investor fraud. Anecdotal stories of grandmothers being swindled out of their life savings in nursing homes abound, but a change in the definition of what constitutes an accredited investor would not lessen the opportunities for fraud. In the most famous example perpetrated by Ponzi artist Bernard Madoff, his customers were by and large very high net worth individuals, sophisticated financial institutions and foundations, all accredited investors who were taken advantage of by a fraudulent salesman. In the angel investing community fraud is virtually unknown and next to impossible to perpetrate. Entrepreneurs make their pitch to angel investors who research companies, analyze economic potential and invest capital after due diligence. Angel investors have direct contact and knowledge of the entrepreneurs and companies they are investing in.
Changes in definition of wealth will also incentivize currently accredited individuals who become unaccredited through new rules to direct their capital to other investments such as real estate, public stock offerings and high risk bonds instead of start-up companies, starving our entrepreneurs from capital and our country from much needed jobs. From 1980 to 2005 the Kauffman Foundation research showed that firms less than five years old accounted for all net job growth in the United States. The large majority of these jobs come from innovative high growth firms, the kind of companies angels fund.
Instead of a one size fits all approach, the SEC should look to adding specific sophistication criteria through a detailed questionnaire to ensure that an accredited investor has the financial experience and knowledge in addition to asset requirements to invest in early stage start-up companies. This approach could help maintain the pool of capital needed for job creating start-ups.
McCannell leads the financial services practice in Washington for APCO Worldwide a communications and public affairs firm. Mr. McCannell represents the Angel Capital Association.