Although the Securities and Exchange Commission (SEC) hasn't yet proposed an increase in the financial resources required for an individual investor to be accredited, the Angel Capital Association (ACA) fears such a move may loom ahead and has been pressing its members to collectively protest such a step.

The ACA sees the issue as having the potential to dramatically deplete the ranks of what are officially called accredited investors, individuals who are free to make the kind of high-risk investments that fuel the funding of financially risky early stage companies that are key contributors to job creation. All angels are accredited investors

Dan Rosen

The issue is front and center right now because when Congress passed the Dodd-Frank Act four years ago, it retained the long-time "accredited investor" threshold of $1 million net worth and $200,000 of annual income but ordered the SEC to do a quadrennial review of the qualifications. The first of those four-year reviews is to be due to conclude next month.

Angel-investor groups successfully overcame an attempt to include in Dodd-Frank a change that would have basically disqualified what by some estimates would have been up to 50 percent of angel investors by boosting the accredited minimums to $2.5 million net worth and annual individual income of $400,000.

But Congress did include in what is officially the Dodd-Frank Wall Street Reform and Consumer Protection Act a change to preclude primary residences from the $1 million-net-worth calculation.

The ACA website plays the job-creation card in preparing for a possible campaign by urging members: "Do you believe in preserving the health of early stage companies and their role in job creation? Then join the Angel Capital Association campaign to 'protect angel funding.'"

Dan Rosen, chairman of the Seattle-based Alliance of Angels and a longtime leader in ACA, says "a change to make the accredited investor definition more restrictive is exceedingly bad public policy."

"This is a time when America needs to unleash innovation and create exactly the kind of jobs that high-growth startups provide," argues Rosen, who until a few months ago chaired the ACA public policy committtee . "Angels fund most of these high-growth startups, investing well over $20-billion per year." 

"We are not financial institutions in New York or Boston, we are individuals in every major city and town in the U.S. who invest not only our money, but also our knowledge and experience, to help these high-growth startups get off the ground and flourish," wrote Rosen, who is CEO and president of Dan Rosen & Associates, a technology investment and advisory firm

Although the multi-part mission of the SEC includes helping facilitate capital formation, the agency makes clear its "investor protection mission" has become most compelling, particularly after the excesses that led up to the "Great Recession."

Thus there is an amusing bit of irony as the SEC may move to "protect" a major segment of the high-net-worth angel-investor category by removing their "accredited" status while preparing to remove protections for scores or "unaccredited" investors by opening the door for them to do crowd-funding investment in startups.

Crowd funding is a concept spawned by legislation known as the JOBS Act, passed by Congress four years ago to permit entrepreneurs or a start-up business to raise up to a $1million a year by selling equity on the internet to up to 500 "unaccredited" investors. Some described passage of the bill and its signing by the president as a "democratization of investments." In essence, Congress felt those across the financial spectrum should all have a chance to own a piece of a company.

The ACA says a survey of its 12,000 members, who are the most active angel investors in the country, found that if the definition of accredited investor was changed to add an inflation factor, which is the standard being urged by those pressing for a change, more than 25 percent of its members would fall below the new threshold. The inflation factor would relate to the inflation that has occurred since 1972, when the accredited regulation first came about.

ACA, whose campaign to bring pressure against the change includes form letter and email template on its website, says such a change would be "devastating," particularly outside the angel-heavy population centers of New York, California and Boston. It claims the number of angel investors across the country outside those three areas would fall by one third.

Even so, not all angels oppose raising the bar for individuals to quality as accredited investors.

Steven J. Schueth, president of First Affirmative Financial Network in Colorado Springs, who has been a leader in the sustainable and responsible investment industry for more than 20 years and created the prominent SRI Conference that rotates annually around the West, is one who isn't sure a change would be bad.

"With my fiduciary duty hat on, I could make the argument that an investor with only $1 million in liquid, investable net worth is probably too small to be investing in private deals," Scheuth said in an email exchange. "I don't think someone with only $1 million has any business playing in this game."

I have assumed that increasing the qualification for accredited investor might have a large impact on sustainable and renewable startups seeking investment and asked Schueth if there might be less S-R investing.

"Perhaps there would be, but would that be bad?  Maybe for entrepreneurs who are looking for capital from less-than-the-most savvy investors," he said. "But would it be bad for investors who now only meet the minimum accredited investor threshold?  Not in most cases.  There's a reason those rules were promulgated in 1972-to protect some people from themselves."

There are some investors who with some portion of their portfolio seek higher positive impact and care less about risk adjusted returns," Schueth added. "When I talk with these people, I try to help them think about making these kinds of investments out of their philanthropy budget; or at least know that the likelihood of making little or no financial return is a high probability."

I asked Schueth, whom I had quoted in previous columns because of his reputation in the sustainable and renewable investments arena, whether he thought it was interesting that while Congressional direction may guide a boost in what it takes to be qualified investor, crowd-funding is opening the door, also at congressional direction, to let everyone in.

"I don't believe I have ever heard anyone claim that Congress is a rational beast," he replied. 

Now that the so-called crowd-funding measure has whipped through Congress with a speed and level of bipartisan support unheard of in recent years, the effort to make it fulfill its promise of creating new companies and jobs begins. And that may prove more challenging than its passage.

Before any entrepreneur with a can't-fail idea rushes to the Internet in hope of attracting a crowd of investors, the Securities and Exchange Commission must first set the rules on how provisions of the law will be permitted to play out. The agency has 180 days to fulfill those duties.

The legislation, called the Jumpstart Our Business Startups Act (JOBS) will dramatically expand the way new companies can raise money and the reduce the oversight for smaller companies doing initial public offerings.

After quick congressional approval last week, President Obama, who admits he first learned about the proposal in early March, will be signing the bill Thursday.  

Supporters view it as a major breakthrough for funding entrepreneurial startups and thus eventually creating jobs. Critics are convinced it is a funding disaster in the making. Both will have to wait to see what the SEC comes up with.

That process that will draw its own critics as it unfolds and the fact it's now in the SEC's hands will likely create some apprehension for friends and opponents alike.

More than a few cynics have suggested that the bill's acronym, JOBS,  is a key reason few in Congress dared oppose it despite a lot of whispered reservations.

What the bill seeks to achieve is the opportunity for people (crowds) to organize via internet websites to fund companies. Using the internet to raise money is a process that's long been utilized for charitable and entertainment purposes.

 The crowd funding approach would open the way for people to invest as little as $500 and up to $10,000 in startups, eliminating the long-time steep financial requirement for investors, other than what's known as "friends and family" investors.

The kind of hype that has marked the rapid progress of this legislation through Congress is nowhere better displayed than on the website of Crowdfunding Offerings, which pitches its ability to provide an investment platform for "the crowd."

So here's the firm's pitch:

"Crowdfunding investing will allow start-ups and existing businesses to raise funds for their companies directly from the public who will invest small amounts of money in return for shares in the company. Americans will finally have the opportunity to invest in ways that have historically been reserved only for the wealthy. Together, America's entrepreneurs and investors will launch the next great ideas of our time!"

When I write occasionally about angel-investing issues, I turn to friends from Montana to California who are leaders among angel investors, with an occasional venture capitalist thrown in. Their collective insights inevitably create a better understanding of the issues, but disagreements among them frequently abound. And so it was with the crowd-funding measure.

The most vocal and opinionated among my angel friends on this issue is Bill Payne, who summers in the Flathead Valley of Montana and winters in the Las Vegas area. Payne, who gets to a conviction about his views because of the respect he receives from angel investors across the West and beyond, describes the bill as "a train wreck waiting to happen."

"Lots of investors will get scammed," Payne suggests. "Just give it a couple of years and Congress will be asking the SEC how they ever let this happen!".

Mike Elconin, San Diego-based leader of the major Southern California angel-investor organization Tech Coast Angels, sums up a concern that even some proponents share.

"The danger is that this new law will engender an expansion of boiler rooms in which slick sales people convince unsophisticated investors to put money into companies at highly inflated valuations," says Elconin. "Whether you think this is a problem for government to prevent, or a matter of buyer beware, depends on your political philosophy."

Dan Rosen, a respected Seattle attorney-investor and a policy director for the Angel Capital Association (ACA), is among those who supported the legislation and helped author an ACA internet post to help inform angels on the bill

Rosen, at the invitation of the White House, will be on hand at the bill signing Thursday. 

Liz Marchi, who presides over the Kalispell-based Frontier Angel Network, frames why many supporters have looked beyond those concerns at what many perceive as the underlying importance of the legislation.

"While there will inevitably be some hiccups in the execution of crowd-funding, I think it's a major breakthrough for early stage seed capital," she said.  "Congress has certainly allowed some risk with this bill, but it drives private capital down the food chain where it is desperately needed to seed innovation."

Tom Simpson, former venture-capital leader who now heads the Spokane Angel Alliance, sees the new law as "not perfect, but a step in the right direction."

"But I agree with Payne that the more investors a new company has, the more the likelihood for problems," he added.

Republican Sen. Scott Brown of Massachusetts, who conceived the measure, offers perhaps the most compelling argument in favor of it.

He explained that the long-time practice of people funding their new businesses by mortgaging their homes is basically no longer possible. So a new source of start-up capital was necessary, particularly in the face of the disappearing hope of bank financing.

My own sense is that the typical congressional supporters of the bill went through the following conversation with themselves:

"Job creation is so politically important today that if it costs investors a few thousand dollars each down the road, it's worth it. Somebody has to pick up the tab for creating jobs and we certainly can't. Poor people buy lottery tickets all the time taking risk far greater than investing in a start-up company. So let's get on with it."