January 6, 2020
1. My Background - I am an Accredited Investor invested in multiple Angel and VC funds as well as direct investments in startups subject to Regulation D. I participate in an initial screening committee for a fund as well as many Due Diligence teams deciding specific potential investments. I am also a member of tthe Angel Capital Association.
In addition, I am the founder and CEO of a startup which is currently self funding but anticipates taking outside investors in the future.
This background gives me perspective from both sides of the table so to speak. The proposed changes do not materially impact me from either my position as an Accredited Investor or as a startup founder.
2. It would be useful for the SEC to publish an analysis on outcomes for both investors as well as funded entities from changes made under the JOBS Act of 2012 that enabled crowd funding, before implementation of any proposed changes to the definition of Accredited Investor. Such an analysis may inform any decisions regarding proposed changes and potential impacts of those changes.
3. Investing in private placements, more specifically investments in startups, is inherently risky and most of those investments result in a loss, even for Accredited Investors. Successful investors typically have a portfolio of investments, with the high rates of return on the most successful investments more than offsetting the loss on the unsuccessful investments and providing a desirable overall rate of return. It's not clear that non-Accredited Investors (non high net worth/high income) are in a position to create a portfolio of investments to address (lack of) diversification risk. In addition, the lack of financial ability of non high net worth/high income individuals to participate in follow on investment rounds creates significant dilution risk for such investors given that most startups seek multiple rounds of investment.
Another risk that needs to be considered is that these investments are typically extremely illiquid for extended periods of time, even if they might ultimately result in a profitable exit.
4a. I support expansion of who is allowed to invest in private placements even with the risk(s) indicated above.
One approach might be to allow a certain percentage of investors in an Angel Fund or Venture Capital Fund to be non-Accredited Investors. I'm arbitrarily suggesting 25% of investors in a fund as a suggested starting point for discussion. There is already an exception under Section 506 of Regulation D that allows sales of securities "to up to 35 other purchasers". This would be an extension of that exemption to enable non-accredited investors to participate in such funds while still ensuring some level of due diligence of the startups being invested in as well as mitigation of (lack of) diversification risk.
"The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment." (https://www.sec.gov/fast-answers/answers-rule506htm.html)
4b. I support a more general easing of the definition of Accredited Investor based on individual investor sophistication and experience, but believe that any tests should be developed by the SEC and licensed for administration by 3rd parties on a nondiscriminatory basis. Specifying only specific 3rd party exams such as Series 7 or similar as a basis for Accredited Investor status does not provide appropriate opportunities for the general public to participate in offerings.
4c. I support expansion of the definition of Accredited Investor based on appropriate educational attainment (MBA, JD, etc) or specific certifications such as CFA, CFP, ChFC, CPA, etc.
5. Having read the published comments to date, I find it interesting that many if not most of the comments are based on self-interest rather than on general principle(s). They seem to be from those seeking to qualify for these types of investments or from those seeking to take money from those seeking to qualify to invest. Any changes implemented should be driven by data and based on principles.