Let’s not clip the wings of angel investors by changing the Sophisticated Investor test

Late last week we felt compelled to start a petition urging the Australian Government to reconsider the ‘Sophisticated Investor’ test.

This petition has now been signed by over 700 leaders in the Australian startup ecosystem who represent the diverse aspects of the startup community. United, these signatories agree that we should reject not just the proposed changes to increase the barrier to entry but to reconsider the framework used to allow individuals to invest in startups.

While interest in participating in Australia’s startup sector has never been higher, these changes could inadvertently stifle the very growth they aim to regulate. In the midst of Australia’s exponential startup wave, proposed changes to the ‘sophisticated investor’ test are unanimously sparking concern.

Raising these bars not only exacerbates inequality within the sector but also threatens the entire startup ecosystem and, by extension, the broader Australian economy.

By significantly limiting the pool of potential investors in Australia, we are effectively slowing down the rate and magnitude of innovation in Australia. This will hurt future job and wealth creation and Australia’s place in the global economy.

Specifically, raising the thresholds will further exclude knowledgeable individuals, exacerbate gender and geographic disparity in investing, and concentrate investment power to a smaller, wealthier segment of the population.

To become a ‘Sophisticated Investor’, you must have a certificate from an accountant that states you have a salary of $250,000 for each of the last two financial years or net assets of at least $2.5 million. That bar is alleged to increase to $450,000 in salary or $4.5 million of net assets, presenting a significant hurdle for innovation.

Some of Australia’s biggest success stories, from SafetyCulture and Canva to Afterpay, have gained international recognition on the world stage. Behind these triumphs are extraordinary individuals who, despite building globally impactful companies, often face barriers to investing in the very startups they’re best able to help.

The petition calls for the Government to reassess what qualifies someone as a sophisticated investor. The petition advocates for the implementation of an education-based certification overseen by the Australian Securities and Investments Commission (ASIC), enabling experts to invest in Australian startups. This certificate would be designed for individuals who possess substantial experience and knowledge in the startup sector.

As Head of Investments and Growth at the Regional Angel Investor Network (RAIN), a membership group for Angel investors looking to invest in Australia’s prosperous regions, I’m often asked by industry innovators if they can participate in exciting startups entering their sector.

For example, farmers who are experts in the field (mind the pun) are always looking for margin gains through innovation. Despite their deep industry knowledge, they may not qualify as an investor. This limits the relationship they can have with the company. Perhaps they won’t become a committed early adopter or advocate for the startup with other industry members.

This proposed shift undermines the momentum of trailblazers, like AirTree Explorers, Startmate First Believers, RAIN and AirTree Pioneers and Aussie Angels, who are democratising the education and structure of angel investing and ecosystem participation in Australia.

While the intent to protect investors from risky ventures is commendable, the proposed changes risk sidelining those who can give invaluable firsthand experience in navigating the startup journey. Striking a balance between investor protection and fostering an inclusive investment environment should be paramount.

The Government’s role in shaping a conducive investment landscape cannot be overstated. This petition is an appeal for a nuanced approach that recognises the value of experienced individuals in the startup sector, considering more than just their financial worth.

Fostering an inclusive angel investment ecosystem will protect our innovators and propel them onto the global stage of technological advancement and economic growth.

This is an opportunity to redefine what it means to be a sophisticated investor in Australia. Let’s not miss it. Sign the petition here.