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Tough Sledding for Start Ups

07/22/2013

Tough_Sledding_BAnyone involved with start-ups today knows it is as difficult an environment for new businesses as ever. It’s tough sledding…and not just because of a lack of snow.

Uncertainty in the stock market, high gas prices, nagging unemployment, Obamacare – all weigh heavily on consumers and investors.

Now it looks like raising money is about to get a great deal more difficult. The SEC could shrink the number of Americans qualified to invest in startups by more than half. That’s what angel investors fear might happen when the agency reviews rules for “accredited investors” next year.

At issue is how rich you need to be for the government to say, essentially, “you’re on your own, buddy,” when it comes to investments. The answer, right now, is you need to be worth $1 million, excluding the value of your home, or you need to earn at least $200,000 a year. If you’ve got that kind of cash, the Securities and Exchange Commission considers you an “accredited investor.” You’re not limited to stocks and bonds like most ordinary Joes and Janes. The SEC says you’re wealthy enough to invest in hedge funds and private equity funds or, as many angel investors do, put money straight into startups with no revenue, products, or even prototypes.

The $1 million net-worth and $200,000 income thresholds were set in 1982 and haven’t really been adjusted much since. In 2011, as required by the Dodd-Frank financial reform law, the SEC excluded the value of an investor’s primary home from calculating net worth. Dodd-Frank also makes the SEC review the standard every four years, starting in 2014. In deciding how rich is rich enough to invest in startups, the agency has to balance the goal of protecting investors with allowing businesses to raise capital. (The question got a lot more salient last week after the SEC lifted the 80-year ban on advertising unregistered offerings.)

Adjusting the thresholds for inflation would wipe out more than half of the country’s accredited investors, according to a new report from the Government Accountability Office. You’d need to have about $2.3 million of today’s dollars to have the equivalent of $1 million when the threshold was set. Making that change would shrink the pool of Americans able to open their checkbooks for startups from of 8.5 million to 3.7 million.

That’s not good for small business by any stretch.

Perhaps this could signal the real rise of Kickstarter.

 

 

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