What About the Beverly Hillbillies?

Senator Dodd’s Restoring American Financial Stability Act of 2010 has brought to the surface one of my favorite discussion “grenades”. Grenades are discussion topics that I like to use when bored with the current conversation because they tend to bring out very strong (and often uninformed opinions). I think this sort of spirited debate (I take whatever side opposes my drinking partner) is fun, most of my friends think I am an terrible instigator. While I stay clear of the “nuclear grenades” of religion, abortion, and Rush Limbaugh, I do like a few economic and finance topics. One of my favorites is the definition of accredited investors. I like this because the discussion forces us to take a look at an uncomfortable assumption. In the case of accredited investors that assumption is, “if you are rich, then you are smart.” Full stop.

Clipping Wings
Dodd’s enormous bill, making him the talk of the Senate locker room, contains two small sections that have raised the eyebrows of many in the business of starting and financing companies. The first messes with Regulation D and would create a complicated mess of state-by-state rules and regulations that would limit the ease and ability of doing any angel funding across state lines. The second, aimed to adjust the standards by which accredited investors are defined. The adjustments were to inflation adjust the $200K income standard and to raise the net worth bar and exclude the value of one’s primary residence. While the income adjustment has been modified by amendment (passed just last night) the exclusion of the primary residence in the net worth calculation remains. While this will certainly have some impact on the available angels it will certainly be less than the 75% reduction in accredited investors projected by the Kaufmann Group based on the original bill.

I have held both the NASD Series 7 and 24 licenses as well as the required state licenses. I have watched “Boiler Room” many times. I know that “Blue horseshoe loves Endicott Steel”. I get the need for oversight. However, I find it hard to feel comfortable saying that if you are rich, then you are smart and can therefore take part in a sector of investments that has created jobs and financial return. If you are not rich, then pick the funds for your 401K and let a smart manager take care of it. How has that worked out for you?

Send Me an Angel
In a time when we need more, not less, investment in innovation we must have this uncomfortable discussion. Wealth is not the right proxy for accreditation any more than being able to get a mortgage is a gauge of whether or not you should buy that house. While I am not a libertarian, I hate reinventing the wheel and the best thing I have seen written on this discussion is from Jeff Joseph, angel investor, venture catalyst, financier and libertarian-leaning CEO of Prescient Advisors and Managing Partner of Prescient Capital Partners and author of the VenturePopulist blog. Can’t wait to use Jeff’s lottery example next time I throw this grenade.

Additional info on the bill and potential impact can be found on the Angel Capital Association website and a nice piece in BusinessWeek by Scott Shane.

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