Expand Accredited Investor Class, Not Shrink It.

There is a banking reform bill working through Congress… in case you hadn’t noticed. Fred Wilson points out, rightly so, that the banking reform does a lot more than just reform banking rules, it goes to the very heart of who can invest in non-banking activities and how.

1) Changing the definition of a “qualified investor” in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd’s bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.

[From Startups Get Hit By Shrapnel In The Banking Bill]

The term “qualified investor” is also known as “accredited investor” and is governed by the landmark Securities Act of 1933, Rule 501 of Regulation D. It states that an accredited investor is someone who has joint or sole net worth exceeding $1m and an annual income of exceeding $200k (Fred is incorrect on this detail point in his post, but it’s not a material mistake) or joint income exceeding $300k for the 2 most recent tax years.

This is not the first time that this status has been the focus of redefinition… in 2006 the SEC proposed redefining this class to limit access to hedge funds and at the time they calculated that 8.5% of U.S. households qualified as accredited investors under the Rule 501 Reg D rules but only 1.3% would qualify under the rules they were proposing.

It’s time we get over our national panic about the investor class and stop trying to kill it off. Nothing good will come from shrinking access to private equity markets and to those who claim these represent eventual financial armageddon if left unchecked I will remind you that the damage done to the financial system by quasi-governmental entities like Fannie and Freddie (in other words run in partnership with the political class) far outstrips the risk that private equity markets pose.

The point of setting a minimum net worth for accredited investors is not to create a means test that limits access to everyone but the very wealthy, it is to provide some assurance that the investors making these investments are not gambling with grocery money. There is no evidence to date that suggests, even remotely, that losses among accredited investors have created a financial crisis that threatens their livelihood, as opposed, for example, no doc interest only sub prime loans.

This Congress and Administration has done a pitiful job of encouraging job creation and at the core it is because they don’t seem to understand how investor markets operate and the critical role they provide for job creating activities. At every turn they have demonstrated a desire to punish, control, and constrain investors and it is doing real damage to our current and future economy.

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