Archive for April, 2015

The Definition of “Accredited Investor” Will Remain the Same

Friday, April 10th, 2015

SEC committee advises that “accredited Investor” definition should remain at $200-$300K HHI & $1M net worth.

SEC committee advises that “accredited investor” definition should remain at $200-$300M HHI & $1MM net worth.

Good news for startups and budding enterprises seeking investment from angel investors…

The SEC recently heard from its Advisory Committee on Small and Emerging Companies regarding Recommendations in the Case to Change the Definition of Accredited Investor.” There was talk about raising the bar to $500M HHI and net worth to $2.5MM, which would have decreased the number of individuals that marketers and growing companies could target for investment capital.

Here’s the main takeaway: The committee found little or no evidence to suggest that the existing definition of accredited investor has led to widespread fraud or other harm to investors.” Quite the contrary, they found “substantial evidence to suggest that the current system works and is critical to the support of smaller public companies and emerging companies.”

The SEC will continue to collect data on the subject, but suggests that the focus should be more directed to enforcement efforts and increased investor education rather than raising the threshold of income and net worth. In fact they felt that raising the bar would have a disproportionate effect upon women and minority entrepreneurs.

Recognizing the importance of small and emerging companies as drivers of the economy and their reliance on raising capital from accredited investors, the SEC is taking a “do no harm” approach so as not to shrink the existing pool of accredited investors (and the pool of capital they bring to the table).

Currently, accredited investors must earn an annual income of at least $200,000 alone or $300,000 combined with one’s spouse, or a net worth of at least $1 million (excluding the value and mortgage debt of his or her primary residence).

While swindlers like Madoff may unfairly damage the reputation of investment opportunity pitches in general, in the angel investing community fraud is virtually unknown and next to impossible to perpetrate says Christopher Scott McCannell of the Angel Capital Association. “Entrepreneurs make their pitch to angel investors who research companies, analyze economic potential and invest capital after due diligence.”

This brings me back to the idea of enforcement. I’m not sure what that looks like on the government side, but I suggest that marketers seeking accredited investors do their own due diligence. They must make certain that their data providers verify that all individuals are in fact bona fide accredited investors.

A reputable accredited investor data provider should:

  1. Vet the data that they collect and append from each source.
  2. Double and even triple verify the information across multiple sources.
  3. Perform outside audits that confirm the accuracy of the data.

 

In a sense, financial marketers seeking individuals with the means to fund startups and help entrepreneurs must look for “accredited data providers.” Ask questions about the data and who may currently be using it. Are there any case studies that can be produced? Ask for references.

If the government specifically states that “enforcement” is the road to take to eliminate the potential for fraud in the accredited investor sector, then you will want to a data provider with a sterling reputation. On top of being in compliance with rules surrounding the marketing of financial services to accredited investors, you will be working with the type of quality data that can yield the ROI that financial marketers watch ever so closely.

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