View in browser Obsessed With Protecting Millionaires By Andrew Gordon on December 17, 2014 When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. - P.J. O'Rourke Dear Early Investor, Do you invest in startups? Until recently, I'd have expected a resounding "no" from readers. Only the few hundred who belonged to a small and exclusive "insiders" club of angel and venture capital investors were allowed to buy shares of private companies. These restrictions were enshrined in regulations issued by the government way back in 1933. They were finally lifted in part last year. Following instructions from the congressionally approved JOBS Act, the SEC issued regulations allowing "accredited" investors to buy shares in young pre-IPO companies. The government adopted the definition of accredited investor that was set forth in 1982. You had to make $200,000 for the last two years (with the expectation of making at least that much in the current year) or you had to have a net worth of at least $1 million. In 2011, the SEC decided to exclude primary homes from counting toward your net worth. The Angel Capital Association called it a "significant shift" in capital availability and "investor access." What Does the SEC Really Think? Once again, the SEC is considering some changes to the definition. And, no, they're not thinking of lowering the income or net worth thresholds. They're contemplating doing one of the following... Raise the thresholds. Leave them alone. Add "investor sophistication" criteria to qualify for accredited investor status. I told you in October I didn't know which road they'd choose. What I did know - and what I told you then - is that the committee that advises the SEC thought the current definition was totally inadequate. I said the committee thought that "many individuals who aren't accredited investors should be. And many who are shouldn't be." And I made clear my opinion in this article. I issued a plea to the SEC to "add the smart and financially sophisticated to the wealthy group" rather than "replace the rich with the smart." And I urged the SEC to be as "inclusive as possible [because] both the wealthy and the financially sophisticated deserve a seat at the startup buffet." The Federal Communications Commission has made a shocking discovery... More than 100 million Americans are losing money every day from something far WORSE than inflation. Discover why you're bleeding money for this so called "convenience" here. FROM A SPONSOR Doing the Right Thing Asking the government to do what's right is one thing. Having faith that it will is another matter. But there are now tentative signs that a consensus is being reached. And it just could increase the number of accredited investors as opposed to reducing their ranks. Consider these recent public statements, especially the one from inside the belly of the beast, SEC Commissioner Daniel Gallagher... I am baffled by continued insistence from some quarters that we need to significantly revise the accredited investor definition. Why should we spend limited Commission resources "protecting" the wealthiest 2-3% of investors in this country? This obsession with "protecting" millionaires - potentially at the cost of hindering the wildly successful and critically important private markets - strains logic and reason. Millionaires can fend for themselves. And other powerful Washington influencers are pulling in the same direction. Barbara Roper is director of investor protection at the Consumer Federation of America. She's also a member of the committee I mentioned a minute ago, and she says... We believe there are ways to solve problems with the current definition that don't necessarily involve raising the thresholds and that don't necessarily involve restraining the flow of capital for private offerings. We've sought to at least maintain and possibly expand the pool of available investors, if we can adopt appropriate protections in the process. Arkansas Securities Commissioner Heath Abshure provides a useful state perspective. And he agrees with both Gallagher's and Roper's approaches... What states really want is a test that really measures sophistication but doesn't place undue verification burden on the issuer. We've always supported adoption of a definition that really reflects sophistication. Ugly Numbers Some numbers captured in a series of charts I want to show you back up these statements. They come from presentations given at the SEC-sponsored Government-Business Forum on Small Business Capital Formation this November. One of the presenters was Rachita Gullapalli. She's an economist at the SEC. Her calculations indicate that inflation since 1982 would push the current individual income level to $492,958; the individual plus spouse level to $628,130; and the net worth level to $2,464,788. Remember, an accredited investor would have to meet the net worth threshold without counting their primary home. As the chart below shows, adjusting current thresholds for inflation would reduce the number of accredited investors by almost two-thirds... And if you take into account the exclusion of retirement assets, as has reportedly been under consideration, then the number of accredited investors goes down by an astounding 69%. The Angel Capital Association estimates that elevating the income level to an inflation-adjusted $400,000 and the net worth to $2.5 million would immediately disqualify 60% of accredited investors. Presumably, the SEC is looking hard at these very same numbers right now, and hopefully reaching the same conclusion as I have... That increasing the rolls of accredited investors by adding financial-sophistication criteria makes a lot more sense than reducing their ranks through the raising of current wealth levels. It's the right thing to do. But this is Washington we're talking about. Many times, that's not enough. Let's hope this isn't one of them. Good investing, Andy Gordon Founder, Early Investing                   Recent Articles From Early Investing Gorillas Not the Only Big Game By Andrew Gordon on December 12, 2014 At 3,600 times initial investment, I lost track. That was the latest count I had for Uber's gift to early investors, based on its $40 billion valuation. Uber is a gorilla in anybody's book, including Geoffrey Moore's The Gorilla Game. The Early Investor Holiday Wish List By Peter Clough on December 10, 2014 May, just once, one of the companies that say they will be the next Google or next Uber actually turn out to be the next big thing... And may we be lucky enough to believe it when it says that. Cracking The White List By Andrew Gordon on December 5, 2014 "Follow me," the CEO said. "It's a great time to buy shares of my company. What are you waiting for?" he whispered. "I'm doing it. And you should too." Okay, CEOs don't really whisper these things into my ear. But I can look up their buying and selling activities anytime I want... © 2014 Early Investing, LLC All Rights Reserved North America: 1 800 683 0687; Fax: 1 410 329 1923 International: +1 443 353 4254; Fax: +1 410 329 1923 Email: news@earlyinvestinginfo.com Privacy Policy | Whitelist Early Investing Click here to unsubscribe Nothing published by Early Investing, LLC should be considered personalized financial advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. 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