

My Open Letter to the SEC - MediaSquirrel
http://www.metamorphblog.com/2010/11/open-letter-to-the-sec-about-ange-investors.html

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raheemm
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.

More history of the "accredited investor" rule can be found here -
[http://webster.utahbar.org/barjournal/2010/11/the_evolution_...](http://webster.utahbar.org/barjournal/2010/11/the_evolution_and_future_of_th.html)

[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.

~~~
gnosis
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?

~~~
MediaSquirrel
Dude, when you're 3 dudes living in an apartment with no money, any govt
regulation is painful and harmful to progress.

~~~
gnosis
How about regulations that keep you from doing stupid or illegal things or
defrauding the people who invest in your company?

------
raheemm
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?

~~~
MediaSquirrel
Actually, the proposed change to rule is not clearly stated. Simply, there is
an unspecified change to the rules on the agenda.

"§413: Propose rules to revise the “accredited investor” standard"

[http://www.sec.gov/spotlight/dodd-frank/dfactivity-
upcoming....](http://www.sec.gov/spotlight/dodd-frank/dfactivity-
upcoming.shtml#01-03-11)

