The Dodd –Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) came about as the government responded to the Wall Street meltdown and the recession.  In it however were some pet projects that did not seem connected to the issues that caused the recession in the first place, one example - the originally proposed “Revised Accredited Investor Standard”.  For a recap of who is an Accredited Investor read my fellow blogger, Dave Broadwin’s exhaustive feature on the same subject.  Also, see Fred Wilson’s blog and the Xconomy article on the start-up community’s concern that perhaps the bill would penalize and cripple the ranks of an important part of the start-up ecosystem, the angel investor. 

In the end, when it comes to the new Accredited Investor definition - it’s not that bad.  The new standard for accredited investor does raise the bar (but not by much).  To qualify under the new standard an individual’s net worth (or joint net worth with their spouse) must be greater than $1,000,000.  However, the net worth must exclude the value of the person’s (or couple’s) primary residence.  Perhaps the government does not want people to make investments based on the purported value of their house.  Why should you be able to claim that you have the ability to make a liquid investment in a speculative investment when most of your assets are illiquid?  The alternative income test of annual income over the last two years of at least 200K annually (or 300K if factoring in a spouse’s income) stays the same.  As a tangential thought, should someone who meets the income test but not the new net worth test be making what is in reality a speculative investment?

I spoke about the new standard and its impact with one the firm’s senior securities lawyers, and his response: “Sure they raised it, they have been talking about doing that for ages, and frankly I am bit surprised that they only raised it the amount they did”.  On the other hand, there are good arguments as to why the old standard was sufficient given how the world has changed over the last three decades and the ability for more investors to protect themselves via access to information and services that was once only available to the very wealthy (see Dave’s blog on this very subject).  At the end of the day, any way you slice it a higher bar means less people who can invest in start-ups without going through the cumbersome registration process which mean less angel financers and unfortunately harder time for start-ups to raise capital to bridge the valley of death.

Check out Foley Hoag’s official advisory on the Revised Accredited Investor Standard and talk to your lawyer to see how the new standard applies to you.