Accredited Investor status Un-American? By Tom Tierney
The Dodd Bill has recently brought attention to the arbitrary “accredited investor” status that must be
attained to invest in early stage (“startup”) companies. Arbitrary, you say? Well take the following two
individual hypothetical examples:
Individual A: 28 year old college Individual B: 28 year old that is still
graduate, obtained bachelor, masters and attending college after 10 years. Has
had problems focusing on studies,
Dd in computer science. Worked in
startup company in engineering and spends more time on partying than
currently has net worth of $750K through studying. Uncle passed away and he
stock options from employer. No has inherited $7.5M for a total net
mortgage, no debt and helps friends with worth of $7.5M.
Pop quiz: which individual meets the current “accredited investor” guidelines for investing in early stage
companies? If you guessed “Individual A”, you have failed the quiz!
Currently, an American must have a net worth of $1M or income of $250K to obtain “accredited
investor” status. I’m sure the original authors of this idea had good intentions: maybe they thought net
worth equated to investor sophistication or might protect investors? As we’ve seen during the financial
crisis of 2008-2009, “net worth” isn’t “net common sense”. The same sophisticates that created what
Warren Buffet termed “financial weapons of mass destruction” were mostly “accredited investors”.
As someone who’s been involved in “angel” or early stage investing for 10 years, I can categorically state
that net worth doesn’t make a great angel investor, I would like to see more “Individual A’s” than
“Individual B’s”. Why not have individuals make the decision to participate in early stage investing
without the imposition of arbitrary government guidelines? Why not let individuals decide where to
invest money they earned? Any American can start a business, why can’t any American invest in one?
I’d much rather see these rules removed and a simple disclosure used for early stage investing:“The
undersigned recognizes and accepts the following risk with this investment: 1) Most early stage
investments fail; 2) Early stage investors typically lose most, if not all, of their individual company
investments; 3) Early stage investors should only invest money they are willing to lose; 4) Sometimes
an early stage investment is successful and returns a multiple of invested capital to cover other losses.”
This disclosure is the four legged stool of early stage investing: it’s a scary position for any investor, but
America has been built on investors willing to take a seat on this stool. Accreditation does not make this
stool sturdier, and I argue, may well weaken it.
Tom Tierney lives in Encinitas, CA and is a member of Tech Coast Angels (www.techcoastangels.com),
an early stage business investing organization - a network of business angel investors.