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:

Dd

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.

Individual A: 28 year old college

graduate, obtained bachelor, masters and

PhD in computer science. Worked in

startup company in engineering and

currently has net worth of $750K through

stock options from employer. No

mortgage, no debt and helps friends with

their startups.

Individual B: 28 year old that is still

attending college after 10 years. Has

had problems focusing on studies,

spends more time on partying than

studying. Uncle passed away and he

has inherited $7.5M for a total net

worth of $7.5M.