Bad news for Entrepreneurs: The recently passed Dodd-Frank financial regulation bill will make it more difficult to raise equity capital.
If selling partial ownerships of small private companies, business owners must comply with Regulation D of the Securities Act of 1933. One of the provisions of this is that securities that are unregistered with the SEC must only be sold to “accredited investors”. In the past, the definition of an “accredited investor” included an individual with a net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of investment or who has an income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
Unfortunately, the Dodd-Frank bill makes a significant change to these criteria: it no longer allows the value of a primary residence to be included in the calculation of net worth.
So forget about asking your friend John, who lives down the street who makes $190,000 and lives in a $500,000 home with a $100,000 mortgage who also has $500,000 in stocks and bonds, to invest $10,000 in your start-up. He no longer will meet the definition of “accredited investor.”
This will significantly impact the size of pool of “accredited investors” which will make capital formation more difficult for many small but promising companies. When you consider that about 67% of net new jobs are created by small businesses, this is bad for unemployment, it’s bad for business, and it’s bad for the economy.