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Risk Capital, at Risk
Business Friends,
We've considered Central Virginia to have advantages when it comes to small business access to capital. We have:
- Community Investment Collaborative, a CDFI (community development financial institution), that offers business loans before a business meets traditional lending requirements;
- Food Shed Capital, providing loans and support to the local food economy;
- investors that are active in supporting growth ventures;
- regional grants for specific populations and activities; and,
- banks that help good business opportunities access funding.
Local community entrepreneur service organizations are also working to increase participation of investors and potential investors. A good example is 'Women On The Rise', designed to connect women investors with some of our most promising female-led startups.
Here is the point of this discussion - the federal government is considering increasing the threshold that allows people to be accredited investors and/or requiring an exam to obtain accredited investor status. Current U.S. Securities and Exchange Commission (SEC) thresholds are net worth of $1 million (excluding primary residence), or income of $200,000 (individually) or $300,000 (spouse and partner.) Indexing for inflation is being considered, which would increase the amounts to meet the Accredited Investor Threshold. Angel Capital Association reported that a possible doubling or tripling of the thresholds may occur. Early research indicates this could knock out about half of the current, active investors supporting some of our most exciting ventures.
Why is this happening? The Accredited Investor Definition has been in place since 1982. Investing is risky business. An accepted "rule of thumb" is to consider that 1 in 20 equity investments may pay off.
According to an article in Angel Capital Association by John Harbison, "Such a change could trigger an existential crisis for early-stage companies who would become starved for much needed capital, since substantially more companies are funded by angel investors than by any other source."
We believe three things.
- It is a challenging market for capital for all, and especially the risky (yet potentially high social, economic or environmental impact), growth-oriented companies.
- We need the wealthy (not just heartily wealthy) investors to have a critical mass of investments. [In crowd-funding, we are allowing general population investment already.]
- Perhaps most importantly, caveat emptor. Let he/she beware and decide themselves where to invest hard-earned dollars.
We will keep an eye out for SEC requests for comments. In the meantime, we remain yours in business support,
Rebecca and the SBDC Team
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