There's much ado and lots of hubbub lately over Dodd's financial reform bill that could have devastating effects on funding startups if it passes. TechCrunch's Evelyn Rusli has a great overview here.
While you need to be an accredited investor to invest in a hedge fund, VC fund, or as an angel in a startup, there is no "accreditation" to FOUND a company.
I think a similar idea should be taken to the early-stage funding of a startup. If you don't have to be an accredited investor to found a company, to risk your life's savings to create the next [insert successful co here], you shouldn't need that accreditation to invest in your family, friend, or neighbor's startup. Just because you're rich, doesn't mean you're sophisticated--[insert laughable millionaire moron reference here].
In today's investment environment, I can get a online trading account and penny-stock trade my entire portfolio 'till the cows come home. I can quadruple it or lose it all it in a week investing in junk bonds. But I can't invest in Facebook, Zynga, or Foursquare? Come on!
Concessions
Investing in hedge and VC funds is a different story. You need big money to move the needle. I don't see an issue with a requirement for accredited investors in these investment vehicles. The removal of the provision that allows your home to count as net worth, eh, that's fine. The original $200k/$1M thresholds were set in 1985, we've been darn lucky those figures weren't indexed to inflation. However, I don't think raising it to $400k/$2M is a good idea.
The key issue is funding startups. Angel investing is limited now to only accredited investors, and for many companies angels are crucial early money to bridge gap from founding to VC (or sustainable revenue). Under the current law, this includes just over 700,000 Americans. Any founder can tell you how difficult it is to raise angel money if you live outside of the hotbeds like the Valley or NYC. It's not impossible, but it's tough.
To really catapult out of this economic downturn we have to maintain, or better yet, increase, the level of angel investment in early-stage startups. You want jobs? Increase angel investment. Get more startups off the ground. To do that, you need more angels.
We should release legions of small, scrupulous investors into the startup world.
The Pitch: Give Angels Wings
I suggest amending the angel investing rules to create a two-tiered system. Investing in startups should be allowed for ANYONE, up to a certain limit. Say, $25,000. Above that, you'd need to be accredited. Cap the revenue for the company receiving these funds at $1,000,000. If I've only got $100k in savings, stock, and cash equivalents, then my $5-10k investment in a startup would be highly scrutinized. A limit of 5-10% of an individual's total capital could be a feature to limit exposure to these higher-risk investments.
Again, if I founded the company I can risk my life's savings, but my neighbor or my Grandmother who believes in me and sees the value in the investment can't even pitch in a little to help? It's ridiculous. I know damn well that the accountant who lives next door would scrutinize an investment in my startup much more than some of the angels I've seen. Just because he's not wealthy doesn't mean he's not savvy. And if you put a window on it, say in the range of $10-25k, you'll exclude a number of higher risk investors on the low end. That's the worry that cause the accreditation in the first place. I think that can be avoided with the right provisions. I agree that there should be limits and safeguards to this, but to exclude non-accredited (read: middle class) investors entirely is just ridiculous.
One feature could forbid or limit the ability to risk additional capital in future rounds of funding if you're still unaccredited at the time of the next round. So dilution would be required. This feature would keep out many risky investors, and push entrepreneurs to fund things leaner. You could, potentially add in a cap of, say, $10k in follow-on rounds of investment. There are ways to add in protections on the company side too to avoid fraud and mismanagement of funds. They may cause some complexity in the funding, but they could be made manageable.
This type of new investment class would dramatically increase the pool of funds available for startups, keep protections in place on hedge funds (the real target of this reform), and be a smart way to invest in high-growth, innovation-driven tech startups we normal folks don't currently have access to.
Come on Congress, unleash a new class of investments in job-creating, amazing new companies.
It just makes sense.
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