Buried inside of the new banking bill is a provision that will raise the requirements to be an accredited investor. The new bill is proposed by Chris Dodd, the senator from Connecticut. The requirements are increasing from $1m in net worth or $250k in annual income to $2.3 million in net worth or $450k in annual income. Angel investment will also have to undergo a 120 day SEC review.
My understanding is that the $1M requirement was signed into law by Reagan in the early 80s.
$2.3M is that amount adjusted for inflation.
You can make a case that the $1M limit was too low (at the time Reagan signed the bill), but imo it doesn't make sense to argue that - in general - any limit should not be adjusted for inflation
Are there really that many angel investors that fall within the 1M to 2.3M net worth range? My initial gut reaction is that this seems to be a bit of an overblown issue. In the bay area at least, virtually anyone with a home on the peninsula probably has a net-worth of around 1M. If the average angel investment is around 100K (not scientific, just a hunch), someone with a net worth of 1M would be investing 10% of their net worth in a really risky investment venture... I would think, therefore, that most angel investors have a significantly higher net-worth in that case.
> In the bay area at least, virtually anyone with a home on the peninsula probably has a net-worth of around 1M.
You're forgetting that most of those folks also have hefty mortgages, so their net ownership of their houses is considerably less than the value of their house. (I doubt that the median price of houses in the valley is high enough that "virtually all" are worth >$1M.)
However, none of this matters because the definition of "net worth" used for determining whether someone is an "accredited investor" specifically excludes many things, including residences.
There's a huge drop-off from $1M to $2M in assets, no matter how defined. These things obey power laws.
Even if the overwhelming majority of potential angels were worth more than the new base threshold, the 120-day SEC review period remains deal-breaker enough.
The bill does not set new requirements at all! It just explicitly authorizes the SEC to adjust the income & net-worth requirements for inflation. The SEC was already empowered to alter the requirements independently of legislation, but has never done so.
The figures quoted are pulled out of their hat -- they just took the old figures and adjusted for the last 30 years of inflation since they were set. Nothing in the bill says the SEC has to do that.
the politicians aren't clueless; they know their job is to support the multi conglomerates - killing competition and funneling taxpayer money to those conglomerates via bailouts
I'm confused why anyone would put this provision in a bill. Does anyone have any background that might fill in the motivation here? They always talk about being pro small business, but this seems fairly blatantly against it.
I for one am at a loss. Someone is writing these provisions and getting them into the Dodd bill. The questions are who and why.
If I were to assume this was tied to the proposals to regulate VCs as ostensibly major economic players that pose systemic risks (insane on its face, since they're too small and their time frames are too long), then it could be part of a general anti-disruptive business thrust.
That's what zapping the junk-bond market was all about (details upon request). In this case it could be an attempt to make sure there are fewer little mammals to eat the eggs of existing dinosaurs and drive them to extinction. The Internet is certainly acting as a massive disruptive force....
But the above musings are very vague, I don't see a tighter cause and effect, just a couple of data points. But provisions like this aren't put into bills randomly. Someone thinks they're a good idea for someone (not necessarily the nation).
Maybe they want to devolve this to the states? There are strong incentives for that to happen in the bill, but I can't see how that would be a good thing for the nation, and it's not like the SEC is really overworked.
I think it's most likely an attempt to cut down on fraudulent hedge funds. Currently, having "accredited investor" status is sufficient and usually necessary to invest in hedge funds, prvate equity funds, and startups. During the dénouement of the financial crisis, many mini-Madoffs were discovered, usually in the $5-200 million range. Most of these were pyramid schemes dressed up as hedge funds, but a few were fraudulent startups as well.
I think the main reason they're changing the definition of "accredited investor" is because it also affects who can invest in hedge funds, not because they're trying to affect startups per se. This is probably classic "unintended consequences."
I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up?
(One should also be cognizant of Buffet's "when the tide runs out, you see who's been swimming naked". While I don't think he meant it in this way, "genius is a rising market" and when the market goes down a lot of scams are driven out into the open because they can no longer keep their game afloat.)
In general, great efforts have been made to paint hedge-funds as eeeeevil, but with little to no evidence that I'm aware of (note Madoff was't running one ... in fact, didn't he make a big deal about his very low management fees?).
And I don't see how this is related:
The ostensible purpose of this legislation is to decrease systemic risk.
Preventing smaller investors from making necessarily small investments in whatever by definition isn't going to have much effect. The issues are big numbers, not small ones. And how does the 120 day delay fit into this???
Devolving the regulation of these investments to the states might in theory help, not that the SEC is a whole lot more useful than a potted plant (cd Madoff).
Regulating VCs as hedge-funds makes no sense whatsoever (that's not a point you're making, but I can't help but wonder if they're related).
I actually did some contract work for them in 2007, shortly before they were busted. I was never paid beyond my retainer. I found out why it was so hard to collect when the story broke in Crains Chicago. Normally I'd fight to get paid but they're now in receivership and I don't feel like taking scraps from charities and individuals who were wronged for so much more than I was.
edit: I understand that's just an anecdote, not real data. Basically media coverage is rare if the scheme is less than $200 million. There are some larger ones that never get attention because very wealthy people get taken and don't want to be made fools of for investing into these companies. I've got friends who work in the real estate business who've told me about several in the Chicago area that have been taken down or are under investigation. It was shockingly widespread, and I'd estimate there's easily thousands active worldwide.
Thing is, < 200 million US$ frauds aren't systemic risks. Yeah, we need to police them, but they don't threaten the system. Madoff's only did because he was such a "pillar of the community" (of Wall Street).
Sam Israel - pretended to jump off a bridge
Markus Shrenker - pretended he'd crashed his airplane
Marc Dreier
Allen Stanford
Arthur Nadel
Nicholas Cosmo
Joseph Forte
I could probably dredge up a few more -- it seemed like there was one every two weeks from July 2008 - Feb 2009, so these are just the few who were based in the US and who have Wikipedia articles.
While the financial reform is mainly being marketed as a fix for systemic risk, there's also a fairly strong contingent of people who want it to address various consumer protection issues such as predatory lending, failure to disclose fess, etc.(Mike Konczal has been following this carefully at http://rortybomb.wordpress.com/ ). While this effort is stalling, some of their suggestions will still probably make it into the bill. Basically, the politicians want to be in a place where they can say that only "the very rich" are in danger of getting ripped off by hedge fund scams.
The challenge here is that all issuance of securities is lumped into the same category of speculative investment by regulators. This might actually be a good time to try to break off a special category for investing in startups that is separate from the normal "accredited investor" requirements, perhaps by capping the amount anyone can buy as a percent of income(10%?) or assets(5%?). Since the main argument for these things is that each individual investment is too risky on its own, adding this sort of requirement for mandatory diversification might be good enough to get a regulatory carve-out for startups.
Please note that I personally oppose nearly all restrictions of these sorts -- I'm just trying to present the arguments of the regulators and to advance some plausible things to lobby for. It's worth keeping in the back of your head that if publicly-traded common stock was invented today as a novel financial instrument, it would be judged by regulators to have such an idiosyncratic cash flow profile that only financial institutions would be allowed to invest in it.
Too bad laws don't have functional test suites to run against changes to see if there are side effects and if the rest of the 'code' still works.
Just so I understand: If I've got 250K in the bank- this would prevent me from doing 10K ycombinator style investments without jumping through massive SEC hoops?
It's not quite that black and white: essentially, the laws around "accredited investors" are there to clearly delineate professional investors from more casual investors so that the person receiving the money can be sure that it will count as a private placement exempt from SEC registration requirements. That, in turn, is to prevent scam artists from inducing people to part with their money by "investing" in a private investment that's totally free of SEC registration and oversight. If you wanted to invest in your friend's startup, you could, but if you wanted to fund other third-party startups with which you had no pre-existing relationship, you'd need to register as an accredited investor.
See grellas's excellent summary from a few days ago:
As absurd as it seems, laws like this don't come out of nowhere just to make people's lives complicated and miserable: the SEC registration requirements are there to prevent scam artists (of which the 20th century that saw rise to these laws saw plenty), and the accredited investor regulations are a way to clarify the exemptions to those requirements.
I think that works well in theory, but as we've seen from Bernie Madoff's case, where the SEC keeps ignoring pleas from whistleblowers to look into the case (because the fox is guarding the henhouse) and the fact that no reform in SEC has been made to this day, that that is not the case.
As an aside, I think most people on this board have a 'everybody is decent and nice' goggle on. Probably why we're the ones getting ripped off by everyone else.
Well, no. If you've only got $250K in the bank you already can't invest. The current requirements are $1 million in assets or $250K annual income. This will move that bar up by about 2X.
I think the change in the dollar value limits are reasonable. It may not be the greatest thing in the world for startups, but I'm not sure it will have a huge impact on the number of angels making investments.
The SEC registration requirements seem like they will cause a lot more trouble.
If you are going to have a minimum amount needed to be an "investor", why would that amount not be pegged to inflation (which is what the provision does)? What is the rational argument for having the (real money) amount needed to invest fluctuate based on inflation as it works today?
There may be an argument for removing the minimum or changing the structure, but just having it stay at "one million dollars" for decades seems absurd.
I think that there is a different sort of "inflation" for starting a business. As time goes on technology gets cheaper and more available. Manufacturing becomes more automated, Just in Time stocking reduces capital requirements.
Just because 1m buys less food than it did 20 years ago doesn't mean it can't finance a similar sized business. You can do more with less - there is much more leverage available with computers, SaaS, outsourced manufacturing and online sales than was available in the past.
I don't see any reason why starting a business won't be even easier in 20 more years.
Now that's a very good point ... so why aren't they pegging it to inflation? Correct me if I'm wrong, but as I understand it they're just making a one time upwards adjustment, plus throwing in a 120 day delay and making a strong push to devolve this to the states.
When looked at as a package, your point isn't sufficiently explanatory.
It's clear that this administration is very much against startups....with government takeover of many industries, healthscare bill designed to tax investments/burden small companies with large health premiums, and now this.
What can we do? Well, unless we remove the politicians that keep voting for these proposals, we will have no choice but to relocate to a friendlier country that doesn't try to kill startups at its infancy. In this day and age, anybody can launch a lean startup overseas.
I downvoted this because it's rather subjective as to what the definition of "taken over" is and you provided no evidence to support your broad claims.
Not so much. The U.S. government has always assumed all of the risk on student lending and was essentially just giving free money to certain private lenders without getting anything in return. It's removing a layer of bureaucracy more than it's a government takeover.
What you are talking about really isn't a competitive industry, it is more of "rent-seeking" behavior where private enterprise extracts tax-payer dollars to subsidize their "business."
That just shuffles who in the private sector gets the data to the IRS, although as long as they're successful they'll ensure the employment of more government workers to oversee the paper to digital capture system.
I'm talking about the necessary people, wherever they are, who then have to process the paper work, deal with random out of band requests, dun people who don't pay up, etc. etc.
That work has to be done somewhere (unless you prefer the model of Medicare with it's low, low overhead and insane level of bogus claims).
It most likely will - the gov't just hands out the loans, customers come to them, they don't have to market or any of that.
But those jobs marketing a government backed loan shouldn't have existed anyways, no institution was taking a risk to earn that interest, it was a legally created market distortion -- so whatever.
Are you seriously arguing the side of a bunch of middle-men who provided no value, saying it's too bad that their industry is going to disappear?
Wow. And I bet you spend the other 364 days of the year talking about how the private sector is so superior through survival of the strongest and all that.
Thank you for your explanation. I would love to go into detail the 'taken over' part, but I believe rude awakenings are best when you discover them yourself.
Buried inside of the new banking bill is a provision that will raise the requirements to be an accredited investor. The new bill is proposed by Chris Dodd, the senator from Connecticut. The requirements are increasing from $1m in net worth or $250k in annual income to $2.3 million in net worth or $450k in annual income. Angel investment will also have to undergo a 120 day SEC review.
http://hnsummary.com/2010/03/30/get-the-anti-startup-and-ant...