As a rule I live by, “if it ain’t broke, don’t fix it!” The new SEC rules violate that basic principle (see: http://www.startuplawblog.com/ or my previous posts). There is virtually no fraud in the Angel Investing asset class, but the SEC has decided to impose (without a Congressional mandate) stringent new rules that will cripple angel investing.

Let me use an analogy. Let’s say that you are a wine connoisseur. You buy a superb bottle of wine each month from a new small winery, knowing full-well that it will be expensive. But you really like supporting small, unknown vineyards and hope that the wine will mature into on that is exceptional in 5-10 years. You have been doing this for years and find that it is worthwhile.

All of sudden you are told by the federal government that before you are allowed to buy a new wine from any small, new vineyard that has announced their new wine, that winery must verify that you can afford to buy this wine.

The winemaker must verify that the purchaser is allowed to buy this expensive new wine or lose the license to sell wine at all. The winemaker says: “I’m just a wine maker and don’t have any ability to check or store financial records.” So she asks his distributor, who says: “I can do that for you, but it will be time-consuming and expensive.” The winemaker is befuddled, since she knows that, unless she can sell his wine in a timely fashion, her business will flounder, so she agrees to pay the distributor, even though the winemaker has always sold directly. She learns that if she never announced that she had a new winery to customers or was a large, established winery these rules would not apply.

So the distributer calls you and says, “give me your financial records, so that I can verify that you can afford to buy this wine.” You really want to buy the wine, since you have done hours or days of research finding the winemaker and studying how she makes great wine. Getting the financial information together is another time-consuming task that has nothing to do with studying wine. You decide it’s just not worth it, so don’t buy the wine.

But being forced to do this EVERY time raises the complexity and difficulty of finding new winemakers. So you decide that buying from only large vineyards is good enough, since you won’t have to go through the hassle. It’s not as much fun, you aren’t supporting the new winemakers that move the industry, but it is less difficult.

This is a direct analogy of what the SEC is imposing on entrepreneurs, startups, and their angel investors. We are being told that we must add to the complexity, cost, and hassle of doing these risky, early-stage deals (where over half fail anyway), while assuming additional risk that the company will have violated a cumbersome and costly regulatory process. If they have made a mistake, then they can’t raise money for a year, which we all know is a death sentence of a startup.

Please contact the SEC, your Congressional Delegation, any anyone else who will listen and spread the word.