There has been a ton of discussion on the blogosphere about Senator Dodd’s ill-conceived plan to make financing harder for start-ups. Check out Fred Wilson’s blog. It will lead you to lots more stuff (in addition to the more than 165 comments – when I last looked). I don’t think there is much I can add to the general dismay over the proposed legislation.

But I did post a comment about the genesis of the term “accredited investor.” One of Dodd’s proposals is to raise the bar on who qualifies as an accredited investor. In short, for a person to be an accredited investor, he or she has to have a net worth in excess of $1 million or an annual income for the last two years of more than $200K (or $300K with spouse) and an expectation of the same in the current year. For more detail on the definition here is a link.

Accredited investors are people the SEC deems able to fend for themselves (generally). So, the standards of disclosure that sellers of securities have to meet are (generally) less stringent if they only offer and sell securities to accredited investors. (I apologize if I am dumbing this down too much. I don’t want to get too deep into lawyerspeak,) As a result, it is a far far easier process to raise money from accredited investors than from non-accredited investors.

The point of my comment is that the accredited investor definition was created by the SEC in the early 1980s and has not been amended since. The SEC thought that this level of wealth was appropriate to deem a person able to fend for him or herself thirty years ago. If you think about inflation, $1mm was a lot more in 1980 than it is today. So, why is it appropriate to have a “lower” threshold today than thirty years ago?

One argument might be that the SEC set the bar too high thirty years ago, but I don’t recall anyone really commenting on this in the time I have been practicing. On the other hand, no one (until Dodd) to my knowledge has been complaining that the level is too low.

The argument that convinces me that the existing definition is OK and should not be changed is that there is a vast difference between 1980 and today. In particular, there is a vast difference between then and today in the whole securities and investment world. The biggest difference, of course, is in the amount and accessibility of information. Anyone can find out tons of information about almost anything: people, technologies markets, securities etc. at any time of the day or night on a moment’s notice.

In addition, people are very familiar with how to obtain this information. In the 1980s there was a lot of public information available (nothing like today, but a lot) however it was actually hard to find. The SEC kept paper records. It was actually difficult and expensive to get the information. The rich could hire lawyers and accountants who knew how to obtain and understand the available data. The ordinary person could not.

To the extent that your ability to fend for yourself depends upon your ability to access information and gather opinions and insights from others, there is just way more reach than there was 30 years ago. So, despite inflation, I think the definition still works.