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Some more on the Big News in Angel Investing

Paul Clark
Paul Clark
Last updated: June 4, 2024
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The big news

A few days ago, Matt authored a blog post outlining the big news from the Securities & Exchange Commission that it was updating the “accredited investor” definition in a few ways.

As Matt noted, this was not “big news” because of any immediate (after 60 days once implemented) impact: the addition of a few thousand securities license holders (12,000?) is a rounding error compared to the population of accredited investors (16 million households) – an increase of 0.1% if you simply take those estimates (and assume that license holders aren’t already accredited based on their income or wealth). Basically irrelevant; we agree with Drew.

It is, however, “big news” because it marks the first time the SEC has allowed investors with “reliable alternative indicators of financial sophistication” to participate in exempt offerings – i.e. you can be an accredited investor for reasons other than the set financial criteria. This is a conceptual shift that could pave the way for other educational courses or credentials to become acceptable to the SEC for showing the required sophistication.

My (Paul’s) personal suspicion is this makes essentially no difference to private market capital flows, capital availability for startups, or angel groups or VC funds – now, or in the future, but fortunately no-one pays me for making predictions!

But is it good news?

Pretty much all media coverage, trade association coverage (here), and general internet reaction (e.g. here) think this is good (huge!) news.

But it’s often a good idea to consider why conventional wisdom might be wrong, so here are a few cautions.

The SEC tries to ensure two things: (1) that investors are fully aware of and fully understand the risks of a potential investment and (2) that investors can afford to bear the losses of that investment.

Changing the definition of accredited investors to those with education on the subject should not hurt (1): allowing people that already understand securities and investing to be accredited investors should not make people less aware of the risks. However, it definitely hurts (2): these newly-accredited individuals are, by definition, less able to withstand the losses because they have less capital.

We generally believe that people should be free to use their money however they please – blowing it on Robinhood, option trading, playing the SC lottery, buying overpriced coffee, or whatever. But if people who are less able to lose money begin to lose money in part because of these changes, the consequences could be substantial and unpleasant.

So, we are cautiously optimistic that this is good news – but want to emphasis (again) that angel investing is risky and difficult, and you should take all the education, collective brainpower, and support networks you can muster before making investments. As always, we recommend diversification, discipline, and taking all the education courses – even if they don’t come with an “accreditation” certificate – you can find. The Venture Carolina website has some to choose from, or join VentureSouth and enjoy our member education content.