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Public policy: Losing New Businesses

Venture south fallback
VentureSouth Team
Last updated: June 12, 2024
Open book

If you thought we were done with the 2011 accredited investor definition change, you would be wrong! Academics love a good change in the rules, as they often create clear boundaries that show how things really worked. Today’s article, Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules by Laura Lindsey from Arizona State University and Luke Stein from Babson College, first uploaded to SSRN in 2017 (get it here).

The paper explores the same rule change to the accreditation definition we discussed last time (Section 413(a) of the Dodd-Frank Act, which removed the value of a primary residence from the calculation of net worth when calculating “accreditation”); it also uses some of the same datasets and difference-in-difference methodology. But the focus this time is the impact on new business formation and related effects (like job creation and wage effects). Can you guess the impact Lindsey and Stein found?

Of course you can: fewer businesses were started. “We find a negative and statistically significant reduction in new businesses of about 2% on average.” (p.3) That’s an “economically meaningful and plausible” effect (p.23). And that, of course, leads to fewer new jobs (this is pretty common knowledge – new businesses create all net new jobs – but here is more supporting evidence) and to lower wages for employees overall. 

The particular nuances here are that it is smaller angel investors (people investing a few thousand dollars in total), not high profile celebrities or super angels, that got hit most – and it is smaller businesses that also got most hurt. They weren’t bad investors and bad businesses: the paper shows once again the good/bad news that these “marginal investors” were not just funding businesses of lower quality. Good businesses didn’t get funded that otherwise would have.

We might not be enough of a conspiracy theorist to say this impact was deliberate, but it’s hard at this point to see these consequences as “unexpected.”

A couple of fun nuggets:

  • Like Jiajie Xu, the authors think this rule change reduced the number of accredited households by “almost 20%” (p.11). Not every household that is allowed to make angel investments does, but still that remains a surprising proportion.
  • for West Virginia… the SIPP sample included no potentially accredited investors.” (p.15). This doesn’t quite mean there are no angel investors in WV, but it does mean the Country Roads Angel Network needs extra appreciation.
  • In the U.S., many angel transactions require no disclosure, and where disclosure requirements do exist, enforcement is lax and compliance levels may be low.” I don’t know what US this is referring to, but the one I’m in does not sound like this!