So, I did some research and here is my understanding of why this rule is bad. The SEC requires any company that wants to sell shares to register with it. There are exceptions to this registration requirement. One of these being that a company is exempt if it sells shares to an "accredited investor".
The definition of "accredited investor" since 1982 has been someone with a net worth of $1 million or $200K annual income or $300K combined income with spouse.
http://www.sec.gov/answers/accred.htm
By changing/increasing the "accredited investor" threshold, presumably less people would be able to invest in startups that are not registered with the SEC. Hence this rule would lead to fewer angels. BTW, the change being proposed is that an investor cannot include his primary residence in calculating his net worth.
[EDIT] Here is a rationale for the existence of the "accredited investor" rule taken from the utahbar link above:
Since as early as the 1930s, regulators and courts have struggled with how to protect individual investors in private offerings of securities while still allowing sufficient investment in private offerings to sustain the growth of start-up and other young companies – companies which have historically been responsible for much of the job growth in the United States.
Eventually, the Securities and Exchange Commission (“SEC”) came up with the idea of “accredited investors.” Accredited investors are individuals or other entities that have sufficient wealth not to need the protection of federal and state securities laws to the same extent as non-accredited investors.
Thank you for the interesting analysis and link. It seems that the issues are:
* SEC registration is meant to protect investors.
* SEC registration is so expensive only large corporations can
afford it.
* Companies can be exempt from the SEC registration requirement if
everyone who purchases their securities meets certain minimum
net worth or income requirements (this does not apply to
35 purchasers, which apparently need meet no minimum standard
at all). Purchasers who meet these minimum requirements
are called "accredited investors".
* The justification for allowing the accredited investment
exemption seems to be a desire to allow investment while at
the same time recognizing that certain well-off investors don't
need the protection SEC registration offers.
* The threshold for being an accredited investor is being raised.
My own responses and concerns about all this are:
* Is it really true that SEC registration is so expensive that
only large corporations can afford it? Just how expensive is
it? Why is it so expensive? Can the expense be made any more
affordable for smaller companies?
* What rationale is being used to justify setting the threshold
for being an "accredited investor" at any level whatsoever?
What makes investors worth $1 million any more able to do
without the protection provided by SEC registration any more
than an investor who is worth only $500,000? Given what we've
seen in the recent financial crisis (where even the wealthiest
investors suffered or even went bankrupt), isn't it clear that
even wealthy investors need more protection?
* Does SEC registration of any given corporation really only
protect the direct investors in that corporation? Or does SEC
registration benefit society and the economy as a whole?
Perhaps we should be thinking of ways to make more corporations
subject to SEC registration, not less. If this can be done in a
way that smaller corporations can afford, why not?
This post is pretty weak. Neither metmorphblog nor the lawblog explain what this rule means. They both declare it as bad. But why?
So what if 'accredited investor threshold' is raised? Will angels not get to make investments? Will they have to pay higher taxes? What is the intent behind raising this threshold? Will it stop someone from starting a ponzi scheme?
The definition of "accredited investor" since 1982 has been someone with a net worth of $1 million or $200K annual income or $300K combined income with spouse. http://www.sec.gov/answers/accred.htm
By changing/increasing the "accredited investor" threshold, presumably less people would be able to invest in startups that are not registered with the SEC. Hence this rule would lead to fewer angels. BTW, the change being proposed is that an investor cannot include his primary residence in calculating his net worth.
More history of the "accredited investor" rule can be found here - http://webster.utahbar.org/barjournal/2010/11/the_evolution_...
[EDIT] Here is a rationale for the existence of the "accredited investor" rule taken from the utahbar link above:
Since as early as the 1930s, regulators and courts have struggled with how to protect individual investors in private offerings of securities while still allowing sufficient investment in private offerings to sustain the growth of start-up and other young companies – companies which have historically been responsible for much of the job growth in the United States.
Eventually, the Securities and Exchange Commission (“SEC”) came up with the idea of “accredited investors.” Accredited investors are individuals or other entities that have sufficient wealth not to need the protection of federal and state securities laws to the same extent as non-accredited investors.