In a recent meeting of the Investor Advisory Committee (IAC) held by the Securities and Exchange Commission (SEC), the Angel Capital Association (ACA) presented a strong case for the importance of Accredited Investors in the investment industry. ACA CEO Patrick Gouhin delivered the remarks, advocating against the SEC’s proposed stricter definition of Accredited Investors.
Currently, the SEC, under the leadership of Chairman Gary Gensler, is planning to implement new rules that would narrow the definition of Accredited Investors. This would in turn decrease the number of individuals who qualify to invest in securities offerings under Regulation D. While the Commission has not provided sufficient evidence of harm caused by fraud in private offerings to current Accredited Investors, the policy shift reflects the belief of the current leadership in protecting investors from themselves.
The ACA currently represents over 16,000 Accredited Investors in 250 Angel Groups. These investors contribute nearly $1 billion annually to early-stage firms and have reported minimal instances of fraud.
Angel investors play a crucial role by providing capital during the early stages of funding, typically from Seed round to Series A. However, they can continue to support the growth of private firms as they progress. These investors willingly accept the inherent risks associated with backing startups and younger companies. This dynamic is integral to the functioning of a market economy, as while some firms may fail, others will ultimately succeed.
Capital investment carries significant importance for economic growth, innovation, and wealth creation. Private investors form the foundation of the US economy, which is widely regarded as the most robust and innovative in the world. To support their argument, the ACA presented the case of the Desert Angels, one of their Angel Groups. Over a ten-year period, this group invested $47 million, resulting in the creation of 58 new jobs for every $1 million invested, generating $4.58 million in wages, and driving $21 million in economic output.
The ACA contends that raising the Accredited Investor thresholds would impede capital formation and hinder the progress made in achieving diversity within the investor class. The group argues that attracting diverse investors is beneficial for promoting diversity among founders, an objective that the Commission appears to oppose.
According to the ACA, “if wealth criteria are raised, the more diverse investors at the lower end of the pay and wealth scale will be the first to be forced out of the investor pool. This would be an unfortunate setback in efforts to expand and diversify the base of investors (not contract it) and to spur innovation and economic growth.” They also caution against increasing disclosure requirements for early-stage firms, another proposal made by the Commission, citing its potential to increase costs and difficulties in starting a company.
While high-profile failures such as the FTX debacle or the collapse of Theranos attract media attention and invoke fear, the notion that investors need greater protection is not supported by facts. As the ACA points out, “because of direct investment, fraud is exceptionally rare in angel investing.”
Early-stage investing is vital for the success of entrepreneurs, as it provides them with the necessary resources to take their companies to the next level. The ACA reports that 90% of private firms that receive later-stage funding from Venture Capital have previously received funding from Angel investors.
In terms of the Accredited Investor status, the ACA suggests maintaining the current wealth thresholds while implementing a sophistication qualification process. This process would allow individuals with a comprehensive understanding of the risks associated with private offerings to participate in the asset class.
The ACA has offered to collaborate with the SEC in developing a sophistication qualification process that would address the current discriminatory approach and enable broader participation in the investor class.
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