Mar. 9, 2022
Dear Investor Advisory Committee, It has come to our attention that the Commission is contemplating raising the qualification thresholds for the accredited investor definition. We believe this an important issue for the Investor Advisory Committee to discuss to help the Commission fully understand the ramifications of their decision since BIO contends that this will have deleterious consequences for the Nation’s startup ecosystems, especially those in the life sciences, as well as those who focus on financing under-resourced (rural) and underrepresented communities. Life sciences entrepreneurs (those who desire to take the leap out of University labs and into their own venture) rely on angel capital to bridge what is dubbed as “the Valley of Death;” the colloquial term that reflects the vast number of companies that are unable to raise the needed capital to progress their science enough to attract venture capital, as noted in the graphic from the Global Federation of Competitiveness Councils. Many great ideas for life-changing medicines never bridge the Valley of Death and society suffers because of it. The life sciences startups that succeed in this part of their journey grow over time and ultimately bring important life-improving and life-saving medicines to market. In fact, 76 percent of all global research and development (R&D) aimed at tackling the COVID-19 pandemic was generated by small biotech companies. Furthermore, small biotech companies are also responsible for 80 percent of all scientific R&D. Almost all of these companies started as a revolutionary idea in a laboratory that was nurtured by angel capital. Without this capital, fewer entrepreneurs would be able to make the leap out of the lab and on the path to change the lives of patients around the world. As the Advocate for Small Business Capital Formation noted at a recent meeting of the Small Business Capital Formation Committee, raising the thresholds as proposed by the Commission (indexing the thresholds to inflation) would reduce the available pool of accredited investors from 13 percent of the U.S. population to just 4.2 percent as income thresholds are increased from $200,000 to over $500,000 and net worth thresholds are increased from $1,000,000 to over $2,500,000. SEC’s Office of the Advocate for Small Business Capital Formation Annual Report recently highlighted the importance of funding dollars for the economy and the disparities present in our current market. The Report cites that: “support for small businesses is critical, as they remain the primary generator of net new jobs in the country from 1995-2020 and running out of cash or the inability to raise new capital is the NUMBER ONE reason startups fail.” “angel and seed deals have expanded beyond tech hubs, but remain very localized.” “Women constituted 33.6% of entrepreneurs seeking angel capital in 2020” but “women-CEOs raised 93 cents for every dollar raised by men-CEOs.” “Only 2.3% of venture dollars went to women-CEOs” “Personal wealth dictates the financial starting line for many entrepreneurs’ businesses. Hispanic/Latino and African American/Black small business owners start with 1.5 to 2.75 times less liquid wealth than their white counterparts. This wealth gap creates ripple effects across entrepreneurs’ personal networks, which further exacerbates challenges to access capital.” “Minorities constituted only 5.3% of entrepreneurs seeking angel capital in 2020” and amid the COVID-19 pandemic’s economic effects, “the decline in business ownership from January 2020 to January 2021 was more pronounced among minority populations.” “Minorities remain vastly underrepresented among angel investors” constituting “5.5% of angel investors in 2020.” To sum it up, angel dollars tend to be locally focused, but they remain mostly available to those with existing networks that include these investors. Removing the few accredited investors from underrepresented and rural communities will have a devastating impact on these communities. This is also reflected in the life science angel ecosystem, which is very limited. Further constraining this already limited pool of capital will yield significant negative consequences to our ecosystem and therefore for patients across the world. Finally, the Commission cited concerns of fraud as a reason for raising thresholds. However, the Commission has not addressed or validated how raising thresholds would address the concern of fraud, nor have they provided evidence that fraud is more prevalent than the economic opportunity presented by angel investing. There has also been no movement in providing enforcement methods to address fraud. In conclusion, BIO believes that the Investor Advisory Committee should discuss the importance of angel investing in the economy and to local communities, and what it would mean for these stakeholders if access to angel funding were to fall by more than 60 percent. Carlo Passeri Senior Director of Capital Markets — Biotechnology Innovation Organization (BIO) 1201 Maryland Avenue, SW, Suite 900 Washington, DC 20024 —