September 5, 2010 by dan.

Most startups first create a feature. If they are smart, it will be a unique feature that fits a demonstrable customer need in the market and they can have many customers adopt their technology. If the company is really good, they will transform this feature into a product. If that works, they might get to create a series of related product and make a product line. Rarely will the startup create a full-fledged company.

It is when a startup grows its business to the Company stage that it can get exceptional value (<$100M). In general this takes experience and skills that aren’t usually found either in a startup or on their board.

Most angel-backed startups have trouble making it beyond the feature or product stage. In the past, many startups counted on VC funding to grow to the product line and company stage. This is now exceedingly rare, given both the number of angel-backed startups and the limited activity of VCs (see some of my previous posts).

So what does that mean? One outcome is that we move our angel-backed startups to profitability and they grow organically. This can lead to an acquisition, but more often than not, exits are rarer than we would like. (I will be doing a post on this soon.)

I predict that we will begin to see a wave of mergers between successful angel-backed companies. This makes perfect sense.

When two companies are in alignment and have products/features that can satisfy a broader set of customer needs, builds revenue and a customer base that exceeds critical mass, and gives the combination the chance to get to the company stage – creating a lot more value than the two companies separately.

Posted in M&A, Exits, Angel Investing, Investments | No Comments »

August 18, 2010 by dan.

Having served on more than my share of boards, and often on the comp committee, I am often asked about the following situation:

• A company has taken quite a bit of investment, usually from institutions and angels.
• The deal that was struck has a liquidation preference (if you don’t know what this means, you should educate yourself). Good terms for companies meeting their goals are 1x participating preferred (sometimes capped); bad terms are 2x to 3x and usually granted when a company is in trouble and needs to raise money.
• Acquisition seems like the best alternative, but the offers are for less than the liquidation preference (or not much more than the preference).

In this case, the common stock and options are essentially worthless. The founders, employees, and others who bet on the upside find themselves in the position of having worked for little-to-no upside (or in the case of board members or consultants who took options – nothing!).

What is the board to do?

Here is my perspective:

• Recognize that management did not deliver the value that was promised when the money was taken. It is not fair to give management a great return, while investors lose money.
• On the other hand, it was management’s sweat that got the company to exit. This needs to be rewarded.
• The board should try, as a first priority, to ensure that management gets a good deal from the acquiring company. This is good for the acquirer and allows the proceeds to go to investors.
• If a carve out is necessary, I believe that it should be graduated (like a graduated income tax). In that way, as the investors do better, management increasingly does better. This aligns incentives. For example, if the liquidation preference is $10M and the acquisition will be in the range of $5-15M, the carve out might look like this:
  • 5% of proceeds for the first $5M (which is $250k at $5M)
  • Between 5-10M, $250k plus 7.5% of the amount over $5M, which is $375k at 10M
  • $875k plus 10% (plus the value of their stock, which is now in the money) for any amount over $10M
• This seems to give both aligned incentives and balance the reward for management with the need to get investors their money back.

Of course, all of this looks much better when the company sells for a lot more than was invested!

Posted in Company behavior, Startups, Boards, Investment Terms, Angel Investing | No Comments »

August 18, 2010 by dan.

Over the last several weeks, I have had a series of experiences where boards have not represented the interests of shareholders. Why? Kindly, you would say inexperience or lack of knowledge. Less kindly – incompetence. Or even less kindly – greed.

In one case, the board, without any form of communication about the company’s status or consultation to the vast majority of shareholders, in short order (1) forced a “pay-to-play round” led by two institutional investors; (b) granted the CEO and other senior managers a HUGE carve out (despite several years of missed targets and poor performance); and (c) negotiated a quick sale of the company where the winners were the management (who got the carve out and a bonus from the acquiring company) and the institutions that forced the pay to play. This was done by a board that was incredibly conflicted, but counted on the fact that the angel investors in the deal (there were about 30 of us) wouldn’t take any action. Payout to the angel shareowners - $0. That’s right – nothing. This is egregious, but not uncommon.

Angels need to be willing to take better actions to protect their investments.

1. We must be willing to band together. I am working with several attorneys and the Alliance of Angels to create an LLC that can be used to aggregate our investments in a company. In this way, we will in aggregate be a “major shareholder” in the startup and get rights and privileges commensurate with a VC. This will add a small expense to our investing and require some overhead, but it should be worthwhile. And the company should love this, since this will be one shareholder instead of many.
2. We need to insist on a board seat and assign one of our members with sufficient experience to take that seat.
3. We must insist that our CEOs communicate, communicate, communicate. I get frustrated with a CEO that has bad news and decides not to share it until there is good news. Often the only communication is one from the law firm representing the startup and usually that is really bad news. Funny how the CEO was quite communicative while raising money from us. Boards need to step up and make sure that their CEOs treat their investors with the respect that they have earned by investing in the company.
4. Boards must represent shareholders in holding management accountable. I’m not saying be obnoxious. But, if you hired a contractor to fix your house and they didn’t do the work they contracted for, you wouldn’t pay them the full amount. Why do boards feel it is OK for a team to miss on their execution and then reward them? Boards need to step up.
5. Carve outs need to be measured. I understand that an acquisition can only occur with a willing management team (and a willing board). If there is a large liquidation preference overhang, (as there often is) management’s stock might all be under water. There is a need to take action to make sure that rewards are balanced. Boards need to be proactive in this. I will be posting a separate blog on my assessment of best practices on this.

So.. investors need to insist that board really do represent them and not allow them to take the easy way out, create conflicts of interest, or have investors take it on the chin. Boards – step up!

Posted in Startups, Company behavior, Rip-offs, Boards, Investment Terms, Alliance of Angels, Angel Investing | No Comments »

June 25, 2010 by dan.

Last week I was invited to speak at an event at Victory Studios in Seattle that was sponsored by the new Seattle chapter of the Institute for International Film Financing (IIFF). I told them I thought they had the wrong person, but they explained that in LA and San Francisco there had been some great interactions between tech angels and the film community – we had a lot to teach each other. I agreed to speak, but was concerned that I really knew nothing about the film business.

I love film (as well as theatre). I’ve loved movies for as long as I can remember and (from my previous posts) you know that I found the new 3D/IMAX experience entertainment-altering. I’ve also blogged about setting up my home theatre to watch movies and loving Netflix on the iPad. I enjoy the output of the film industry, but really have no knowledge about film as a business, nor have I ever given it much thought.

I found myself at a film studio, sitting among a panel of film experts, including experienced producers, speaking to an audience of established and aspiring film makers, producers, and directors. As I listened to them speak, I realized why I was there. There really were a ton of similarities!

Listening to a producer discuss how the director and stars had a strong desire to create the vision exactly the way they wanted it, without regard to the budget, sounded like a conversation I had just had with the CTO/founder of a tech startup who had delayed shipping on schedule to get it exactly right. A discussion about the need to consider marketing budgets in film production sounds so eerily similar to that of a web company that had only budgeted sufficient money to launch their product, but not enough for distribution. And there was a long discussion about using social networks to enhance views that could have been a web startup as well as a movie.

The similarities do abound. Is a short film marketable? (Is a single feature company marketable?) Can a director be a producer as well? (Can a tech founder be a CEO?) Etc.

But for me, the biggest learning experience is how the movie industry has paralleled the tech industry. It used to cost many $M to produce a film, just like it used to cost $20+M to build a software company. You can now produce a film for several $100k’s. The technology has made it easier to do the filming, do the editing, etc. Even distribution is changing markedly. For example, you can distribute a film entirely on line, using services like YouTube and Netflix.

However, I also realize that, while I have some expertise in startup deal structure and terms, this might not apply to film ventures. I haven’t yet taken the time to review the kind of deal structure, partnership arrangements, rights, etc of a film deal. Nor have I looked at the business/revenue models that apply to film. I sense that most film investors do so more on gut, instinct, and passion than the smart tech investor.

The main difference is that most tech (or medical) startups create a product that doesn’t have to be a “hit” to succeed. If you get it wrong, or your timing is wrong, you still have the opportunity to fix the situation. This makes investing in a single film very different than investing in other startups. Most of our tech startups are more like investing in a studio than a film. This might dissuade a tech angel from film.

Comments from experienced film investors very welcome.

Posted in Entertainment, Angel Investing | 1 Comment »

May 17, 2010 by dan.

All of the work on the Dodd bill by angels and their supporters in the Senate has paid off. Today, a bipartisan amendment sponsored by Senators Kit Bond (R-MO) and Senate Banking Committee Chairman Christopher Dodd (D-CT) and co-sponsored by Senators Mark Warner (D-VA), Scott Brown (R-MA), Maria Cantwell (D-WA) and Mark Begich (D-AK) was adopted by voice vote as part of the financial reform bill being debated in the Senate. See the following announcement:

http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=a8a93650-936c-1e68-27b0-a38401ac9619

Thanks to all of the angel investor groups who contacted their Senators, and thanks to those Senators who recognized the importance of our mission and got the entire Senate to support our cause.

Posted in Legislation, Angel Investing | No Comments »

May 6, 2010 by dan.

Greetings from San Francisco, where I am attending the Angel Capital Association (ACA) annual meeting. This afternoon, the ACA introduced a new award named after Luis Villalobos, one of the nations’ most prominent angels and founder of the Tech Coast Angels, who unexpectedly died last Fall. I was asked to introduce Christina Lomasney, the Modumetal CEO. Here are my remarks and the ACA press release:

Thanks, Richard [Sudek, the chair of the TCA and outgoing ACA board member].

It was just one short year ago in Atlanta that Luis and I decided to walk back from dinner and discuss our shared passions for Angel investing and innovative companies.

It is my distinct pleasure to introduce Christina Lomasney and Modumetal – both of whom embody my discussion with Luis and a great example of Peter’s [Diamandis, Chairman of the X Prize Foundation, who had just spoken] exponential company.

In more than 25 years of investing in and starting companies, it is rare to see an idea that can create and industry and change the world. Modumetal is such a company.

Christina has inspired the Alliance of Angels and other local angels with her vision to invest more than $4.9M. And inspired her employees to achieve great things with limited resources. And inspired large customers to bet on this early stage startup. Modumetal is a great example of why we angels do what we do – investing in innovative startups and helping them change the world.

Join me in recognizing the 2010 Luis Villalobos Award winner – Modumetal and Christina Lomasney.

Here is the ACA Press Release:

For Immediate Release

Contact:

Marianne Hudson
ACA/ACEF
913-894-4700 x1 (or 816-668-2248)

mhudson@angelcapitalassociation.org

Contact:
Erich Mische
Modumetal
877-632-4242
erich.mische@modumetal.com

Modumetal Named 2010 Luis Villalobos Award Recipient

National Award Recognizes Most Innovative Idea Financed by ACA Angel Group

San Francisco, CA, May 6, 2010 – The Angel Capital Association (ACA) named Modumetal of Seattle, WA, as inaugural winner of the Luis Villalobos Award.

The national award, which was established in 2010 to honor the late Mr. Villalobos, founder of Tech Coast Angels and a true “leading light” in the angel field, recognizes the most ingenious and innovative idea recently financed by one of the member angel groups of the Angel Capital Association.

Christina Lomasney, Modumetal co-founder, president, and CEO was presented the award at the 2010 ACA Summit in San Francisco, CA. The Summit was attended by 400 angel group leaders and investors from the United States, Canada, and 23 other countries.

“Luis was an innovator and a ferocious learner and tireless entrepreneur supporter,” said Richard Sudek, chairman of Tech Coast Angels and chair of the Luis Villalobos Award committee. “He started one of the early angel groups, and was intrigued and excited about innovative technology, science, and new ways of doing things. It made so much sense for ACA to honor Luis with this award which recognizes entrepreneurs who make very unique contributions that are disruptive or game changing.”

Modumetal is creating a new class of ultra-high performance nano-laminated materials.

“The leadership and support that Mr. Villalobos represented in helping entrepreneurs to realize their visions for the world echoes clearly today for Modumetal in his stories, his example, and in his own perseverance in realizing the Tech Coast Angels.” Lomasney said. “The Modumetal team is grateful for Luis’ inspiration and is honored to be the first to receive the Luis Villalobos Award for innovation.”

The Modumetal by Design™ process uses electricity instead of heat to grow metal from the ground up, in nano-scale layers. Modumetal, a revolutionary nano-laminated alloy system, is stronger and lighter than steel, can run longer and hotter than nickel-alloys, is more corrosion resistant, and costs less than stainless.

Alliance of Angels (AoA) of Seattle, WA co-led a multimillion-dollar Series A investment round in Modumetal. The syndicated round included significant investment from AoA members as well as from co-lead investor Second Avenue Partners and the Washington Research Foundation of Seattle.

“Between the people, the product, and their approach, I think Modumetal is one of the most creative and innovative companies in my twenty-five years of investing,” said Dan Rosen, Alliance of Angel chair.

Modumetal’s nano-laminate alloys have the potential to create an entire multi-billion industry that will transform transportation, aerospace, energy, and defense industries.

“This is exactly the sort of deal that Luis would have loved,” Rosen said. “Modumetal has inspired its employees to achieve great things, its investors to believe they can change the world, and its customers to work with this small startup to implement this striking innovation and change the way things are done.”

–

The Angel Capital Association
(ACA) is a trade association that supports angel investment groups in North America. ACA was founded by angel investment groups located in the United States and Canada to help maximize the success of group based angel investors. (www.angelcapitalassociation.org)

Modumetal of Seattle, WA, is realizing the commercial potential of a unique class of nano-laminated materials. The Company is creating materials that will change design and manufacturing of metals by redefining structural, corrosion, and high temperature performance. Modumetal is made by a “green” electrochemical manufacturing approach, which reduces the carbon footprint of conventional metals manufacturing at the same time that it revolutionizes materials performance. (www.modumetal.com).

Posted in Modumetal, Alliance of Angels, Angel Investing | 1 Comment »

May 3, 2010 by dan.

Senator Maria Cantwell (D, WA) is an entrepreneur and knowledgeable about startups and how they drive the economy. Here is a letter that she sent to Senator Dodd about the pending bill that could cripple angel investing in the US. Way to go! We all owe her thanks.

Maria Cantwell Letter

Posted in Legislation, Angel Investing | No Comments »

April 22, 2010 by dan.

by Dan Rosen, Joe Wallin and William Carleton

As we have previously blogged, Senator Dodd’s financial reform bill has posed a grave threat to angel investment and startup communities nationwide by virtue of two provisions in the bill that would have upended Regulation D. These “reforms” were ostensibly to address the problem of unscrupulous brokers, dealers, and promoters who have abused Reg D to defraud investors. The problem was, the provisions in Sen. Dodd’s bill were unnecessarily broad. Fraud is uncommon in angel investment transactions, and there were other ways to reform Reg D without gutting the rule that is working well to make startup and angel financing safe and efficient.

Here’s a quick refresher on the two problematic provisions in Sen. Dodd’s bill, problematic for startups and angels. The first provision would have adjusted the threshold at which angels qualify as “accredited investors,” sending two-thirds of active angel investors in the United States to the sidelines, ineligible to participate in getting startups off the ground. The second provision would have required companies to wait 120 days for the SEC to determine if they qualify for a securities law exemption that is self-executing (meaning, no waiting) today.

Well, whatever the outcome for the overall financial regulatory reform legislation now being debated in the US Senate, it appears that the startup and angel investing community can breathe a huge sigh of relief this week.

That’s because it now appears that Reg D will survive largely intact.

In fact, Reg D may be amended in a way that will improve it.

The below table compares what had been proposed with amendments now making their way to the Senate floor. We believe the amendments to save angel investing and startup financing will be sponsored by Sen. Dodd himself. The sound policy represented by these amendments was achieved largely through the efforts of the Angel Capital Association, under the leadership of its Executive Director, Marianne Hudson, supported by the ACA members’ contacts with Senators and their staffs.

To date, the legislative process has worked better than we imagined it could. The language of the amendments saves angel investing, keeps costs for startups where they are now (still not low enough!), and gives state regulators the green light they need to pursue the fraudulent broker dealers and scam artists who have abused Reg D. (No responsible member of the start-up ecosystem would want fraud to take cover under Reg D; that favors no one and, as members of the startup and angel investing community, we hate bad behavior as much as any group of citizens.) The angel investing community was able to focus the attention of the Senate Banking Committee on preserving what works well now, while meeting the direct problem that concerned state securities regulators. All of this was supported, in the background, by Senators and their staffs who “got it.” We also believe that Congressional staffers who tweet could see the groundswell of rising consciousness on the issue among entrepreneurs. Architects of this effective social media effort included Matt LeVeck and Irene Tamaru.

The new reforms are not law yet, so we must remain vigilant. The sections could be further amended on the floor of the Senate, putting harmful provisions back in the bill or changing the provisions once again. If the bill is passed by the Senate, it would yet need to go through a reconciliation process with the House; and other action by the House could effect changes. So we’re not letting our guard down yet. But we are saying, it’s time to tell your representatives that you thank them for listening, and that you’re keeping watch on how this finishes.

Posted in Legislation, Angel Investing, Investments | No Comments »

April 8, 2010 by dan.

(With thanks to Bill Carleton and Joe Wallin)

High-growth startups are a cornerstone of our economy. Studies have shown that these startups account for much of the job growth in the US and are critical for America’s competitiveness. Angels who finance these companies often become actively involved and help the companies thrive. Angel investment in startups provides the primary and the best source of early-stage capital needed for startup tech companies and other innovative new businesses in America. Such investment is encouraged in many states and other countries.

Section 926

Section 926 of the Dodd bill would impose new, unwarranted and devastating restrictions on the “Reg D” process by which Angels (and Angel Groups) support America’s startup innovation economy. Moreover, as we explain below, these restrictions are wholly unnecessary: more-effective, more precisely-tailored reforms are available to fix the abuses of Regulation D that occur outside the Angel investing arena.

We do not believe that it is the intent of Sen. Dodd or Section 926 of his bill to do so, but a consequence of the current language in the bill would be to seriously impede angel investments.

Today’s process (Reg D) requires that startup companies funded by “accredited investors” (sophisticated business Angels who understand the risks in such investments) can invest without undergoing the expense, complexity and delay of a registration process. Instead, within a few days after the first sale, startup that has received the investment files a simple “Form D” notice filing with the SEC and with each state in which an investing Angel resides. This system has worked well for over 15 years, as shown by the growth of early-stage companies. Remarkably, there are virtually no examples of fraud or abuse in such angel investments.

On reflection, it makes sense that Reg D should work so well for startups and Angel investing. First and foremost, the startups in which Angels invest are not in the business of selling or trading securities. They do not engage broker dealers to do so, and they do not sell to the general public. Instead, these startups are placing securities directly in the hands of sophisticated Angels in order to obtain needed capital to get a new business off the ground. If the startups and the Angels are successful in what they set out to do, they will create jobs in the process and possibly returns on investment. Angels know the risks, going in.

In this vital process, the way that innovation in America is financed at the grass roots, no one is making a living or taking a profit from the process of selling securities. Startups are “incidental” issuers only, and all participants in startup “grass roots financing” (including entrepreneurs, Angel investors, and lawyers) have every reason to self-police. In the rare instances of securities fraud, the Reg D exemption notice filings serve a critical record-making function, just as they should: investors who feel cheated can sue to show how a Reg D exemption was claimed and filed falsely. If there was fraud, those investors are going to have recourse, personally, from the officers, directors and others associated with the rare problem startup. And you can bet the persons in those rare, fraudulent startups will not be supported again by the Angel community, nor should they be.

Section 926 wants to toss out this process that has worked so well and start over with a 120 day review period for all Reg D filings. For most early-stage startups, time equates to life or death and the regulatory review process proposed in Section 926 will kill many promising companies. For those of us willing to spend the time, expertise, and money to start potential high-growth companies, the changes that would be imposed by Section 926 seem unnecessary and counter-intuitive.

Section 926 also wants the SEC to define by rule a class of securities that are too small in size and scope to merit eligibility for the uniform, federal Reg D notice exemption system. But it is exactly the small, “seed” (getting a startup off the ground) financing that most needs the benefit of Reg D!

From discussions with Joe Borg (Director, Alabama Securities Commission, and Member, NASAA Board of Directors) and others, we have come to understand that the States, as a part of financial system reform, have been plagued with certain disreputable promoters, brokers, dealers and investment advisors (”bad actors”) defrauding investors by abusing Reg D filings. The State regulators have the authority to prosecute, but feel they are hamstrung by being able to do so only after the fact when the money is already gone. The primary intent of Section 926 is to give the States the ability to regulate these “bad actors” before they are allowed to take in funds under fraudulent terms. Angel investors and groups share this concern and would like to suggest a solution to the State Regulators’ problem that does not restrain Angel investors (or Angel groups) from creating high-growth startups.

There is a valid need to regulate promoters, brokers, dealers, and investment professionals that raise money for others. Attached you will find a suggested amendment to Section 926 that achieves the following:

Address the concerns of State Securities Administrators by:

• Eliminating federal preemption of state authority with respect to exempt offerings that that involve brokers, dealers, or investment advisers.
• Instructing the SEC to amend Rule 506 of Regulation D, to incorporate by reference the disqualifications already in Regulation D that pertain to Rule 505, so that “bad actors” can’t abuse Regulation D.
• Clarifying that existing state jurisdiction to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct, applies not only to broker-dealers, but also to investment advisers.
• Disallowing the use of Rule 506 for offerings that are not “all accredited investor” offerings (current rules allow 506 offering with up to 35 non-accredited investors if certain information requirements are met).

Address the concerns of startups and angel investors by:

• Eliminating the 120 day SEC wait/review period in the current version of the bill.
• Eliminating the authority given to the SEC under the current proposed bill to establish, by rule making, a class of securities offering that would be too small to merit federal exemption, leaving in place the current, national, uniform notice-filing system for startups.
• Clarifying that a security is a covered security with respect to a transaction that is exempt from registration under Rule 506, including with respect to groups of purchasers comprised solely of accredited investors.

We believe that this meets the needs of the State Regulators to clean up the industry without the chilling effect that an elimination of Reg D would impose on funding startups by accredited angel investor.

Furthermore, by eliminating the “bad actors,” we will enhance the ability to get new startups going – investors will feel more secure in knowing that they are not investing in scams. This is a true win-win.

Section 412

Also of concern in Senator Dodd’s bill is Section 412, which would change the definition of an “accredited investor.” It is hard to argue that an individual with a net worth of greater than $1,000,000 is not a sophisticated investor. Section 412 would index that $1M back to 1982 and make the new definition $2.25M, eliminating 77% of the potential accredited investors (see Shane’s article in Business Week (http://www.businessweek.com/smallbiz/content/mar2010/sb20100318_367600.htm).

Section 412, in our view, is nothing more than a poorly conceived tool to limit the scope of broker dealers and investment advisers abusing regulation D. The tool is poorly conceived, because it is so indirect. In the process of eliminating three quarters of the population from which the fraudulent broker-dealers might operate, it also would devastate the single most important source for start up financing in America. And it would also prevent knowledgeable and sophisticated angel investors with high net worth (but not high enough) from receiving the returns that their richer brethren receive; this is neither fair nor democratic and, once again, not in the spirit of the Dodd bill.

As part of saving angel investing, if we make the protective changes to Section 926, we believe that we no longer need the protections suggested in Section 412 – there should not be an indexing of the definition of accredited.

___________________

Amendment to S. ____
“Restoring American Financial Stability Act of 2010″
Offered by ____________

Page 816, strike line 3 through page 819 line 4 and insert the following:

 SEC. 926. AMENDMENTS OF RULE 506 UNDER REGULATION D ;  AUTHORITY OF STATE REGULATORS OVER REGULATION D 
 OFFERINGS INVOLVING BROKERS, DEALERS, AND 
 INVESTMENT ADVISERS. 

Section 18(b)(4) and Section 18(c)(1) of the Securities Act of 1933 (15 U.S.C. Sections 77r(b)(4) and 77r(c)(1), respectively) are amended —

(1)    by inserting, following subparagraph (D) of said Section 18(b)(4), a new subparagraph (E), as follows:

“(E)    Rule 506 under Regulation D, provided that all purchasers with respect to such transaction are accredited investors, as such term is defined in the rules of the Commission under the Securities Act of 1933, or are persons, entities or groups composed solely of accredited investors purchasing securities solely for the beneficial interest of said accredited investors.”

(2)    by redesignating paragraph (1) of said Section 18(c) , “Fraud Authority,” as subparagraph (1)(A) thereof, and restating it as follows:

“(A)    The securities commission (or any agency or office performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by, a broker, dealer, or person associated with a broker or dealer, or an investment adviser, or persons associated with an investment adviser, in connection with securities or securities transactions.”

(3)    by inserting, following such redesignated and restated subparagraph (A) of said paragraph (1) of Section 18(c), a new subparagraph (B), as follows:

“(B)    A security is not a covered security with respect to a transaction that is exempt from registration under this subchapter if the offering of such security involves the payment of any commission based on funds raised by the issuer in connection with such offering, or otherwise involving a broker, dealer, person associated with a broker or dealer, or involving an investment adviser who has a financial interest, direct or indirect, in the offering of such securities, or a person associated with such an investment adviser.”

(4)    by inserting, following subparagraph (D) of said Section 18(c)(2), a new subparagraph (E), as follows:

“(E)    AVAILABILITY OF PREEMPTION CONTINGENT ON LACK OF DISQUALIFICATIONS. The Commission shall amend, by rule, Rule 506 under Regulation D, to disqualify securities issued in reliance on said rule as covered securities under Section 18(b) of the Securities Act of 1933, for reasons which are comparable to the disqualifications currently set forth at subparagraph (b)(2)(iii) of Rule 505 of Regulation D.”

Posted in Startups, Legislation, Angel Investing, Investments | 4 Comments »

March 25, 2010 by dan.

As those who are following this topic know, the Senate Finance Committee moved Dodd’s Financial Reform bill out of committee without any amendments. This unusual move means that the three sections that might cripple angel financing remain in the bill. It becomes more critical than ever that we notify our senators of our adamant opposition to these sections that could have disastrous effects on early stage companies and financing.

At yesterday’s Alliance of Angels monthly meeting, I presented a few slides on the issue (http://drosenassoc.com/AoA Public Policy Issue.pdf) and we asked our members to sign these letters:

Cantwell Letter

Murray Letter

We then faxed the signed letters to Senators Cantwell and Murray. (If you are in another state and want the word versions to modify, they are at Word version of Murray letter, Word version of Cantwell letter).

I urge you do send them as well.

Posted in Startups, Legislation, Alliance of Angels, Angel Investing | No Comments »