Angel investors and startup founders are signing a new petition urging the federal government not to increase the asset limit test for ‘sophisticated investors’, claiming major changes could limit funding to Australia’s most innovative early-stage startups.
The ‘sophisticated investor’ test allows investors with at least $2.5 million in assets, or two years of income over $250,000, to invest in financial products off-limits to everyday retail investors.
This includes investments with significant risk profiles, like venture capital deals funding early-stage startups.
The Australian Financial Review reports the federal government is considering increasing the asset threshold, which has not been indexed for inflation since its introduction in 2001.
Notably, the asset threshold includes the family home.
This means more Australians could qualify as ‘sophisticated investors’ today than in 2001 because of growing property values, without those homeowners actually building skills as investors.
The Australian Securities and Investments Commission (ASIC) has recommended indexation to account for two decades of inflation.
The AFR says that would bring the asset limit to $4.5 million, and the gross income test to $450,000 per annum.
The report sent shockwaves through Australia’s venture capital scene and the angel investors who choose to financially back local startups on their own.
On Thursday, Will Richards, head of investments and growth at the Regional Angel Investor Network, created a Change.org petition urging the federal government not to upgrade the asset tests.
“This change significantly impacts the entire startup ecosystem and has downstream effects on the broader Australian economy,” he said.
Richards instead advocates for ASIC to establish a new certification process, instead of the current system, which requires an accountant to sign off on a potential investor’s ‘sophistication’.
“The certification process should include comprehensive educational modules covering various aspects of startup investments, risks, regulatory frameworks, and ethical considerations,” Richards said.
The petition has garnered nearly 50 signatories so far, including Peter Whittle, CEO and co-founder of farm management startup AgKonect, and Nilushanan Kulasingham, founder of game design startup Stori.
“If you want to kill startups in AU, here is the easiest way to do it,” Kulasingham wrote in support of the petition.
Alan Jones, general partner at M8 Ventures and leading voice in the Australian startup space, has also signed the petition.
Speaking to SmartCompany, Jones said Australia should embrace a knowledge-based test instead of relying on raw asset and income values.
“It shouldn’t be an asset and income test, I think it should be a test,” he said.
“I think it should be based on knowledge and experience.
“So if you look at other markets, that take the similar cautious approach to allowing citizens to invest in alternative asset classes, what they do is they make you study the curriculum, and then you sit an exam, and if you pass the exam, you’ll qualify.
Elevated asset and income thresholds could discriminate against seasoned investors without extremely deep pockets, he continued.
At the same time, omitting a knowledge-based test could also allow wealthy but inexperienced investors to delve into the market — without learning how to pick solid investments and minimise the odds of losing it all.
“What we do in Australia is ask ‘Are you wealthy?’, then you can do it,” Jones said.
“So that conflates wealth with knowledge and experience. Those two things are very different.”
Shrinking the number of potential angel investors could “cut away the legs of a whole generation of early-stage tech startups”, that rely on angel investment to build their ventures before traditional venture capital firms come in with seed-level investment, Jones added.
The federal government’s approach will be guided by Treasury advice, which will reportedly be handed down in the coming months.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
