Small Business: Angel Investors in Danger?

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If you are looking for small business capital then it’s possible that the odds of you being successful have just been significantly harmed!

For some time, SEC regulations have outlined what is an ‘Accredited Investor.’ As an entrepreneur, your ability to raise money from Angel Investors is constrained to those people who overcome the hurdle of being an ‘Accredited Investor…

For some time, accredited investors, as it relates to Angel Investors were:

  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

(Rule 501 of Regulation D – SEC regs)

So what does it mean to you if you’re an entrepreneur or if you’re about to start a business?

A few things…

…this is a body or organization somewhere which is deciding who are allowed or are not allowed to invest in your business…

You might have thought that anyone can invest in your business…perhaps your best friend, your aunt, the local Priest, but the reality is that there are long standing regulations which dictate who you are allowed to sell shares in your business too…

And here’s another kicker…it looks like the hurdles which determine who are or are not allowed to invest in small business have been increased.  Now it’s true that an amendment has been approved, but even so…

…here is one change to the regulations for example which could severely reduce the number of accredited investors

Remember this provision from above…

“A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;”

…previously that $1m of assets could include a person’s house…now, it cannot!

This one change alone means that the number of angel investors out there who are legal able to invest in young businesses has just been reduced…now the argument is that the regulations are being put in to protect the unwary or the downright stupid (I’m paraphrasing…) but who ever decided that having a certain number in a bank account was a good indicator of smarts or investor insight?

With the advent and growth of the structure of legal corporation’s decades and decades ago – where the liability of the investor is limited to the initial investment made – I wonder why we need the accredited investor regulations to be tightened and come to that…

Why we need them at all?

Andrew

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