Category Archives: Legislation

Crowdfunding

Crowdfunding is about to be approved by Congress and signed into law by the President. For those unfamiliar with the concept, you can read Wikipedia (http://en.wikipedia.org/wiki/Crowdfunding) or simply put it is raising money for startups, typically via the Internet, in small chunks from people who may never meet with or diligence the company. Crowdfunding has been used in some non-profits for years and has been successful in Europe for the last two or so years as well.

Most existing investors in this early-stage asset class hear of crowd funding and have the immediate reaction: “Won’t this lead to massive fraud?” Today, investments in unregistered securities require that all investors be “accredited” so that they are assumed to understand the risks in these investments and ensure that sophisticated investors carefully vet deals to ensure that there isn’t fraud.

But, times change. Some VCs and Angels have become fabulously wealthy and famous by investing in early-stage companies, and the media has made a big deal about this. Think Google, Facebook, and even Microsoft. And, in our current economic malaise, creating high-growth, innovative startups is seen as a way out of the mess. But many innovative startups fail in trying to raise money. Angels do their part (see many of my previous posts). But many believe that the need is greater than sophisticated (“accredited”) Angels can finance.

So.. the idea of Crowdfunding has gained great momentum. The current vehicle, H.R. 2930, the Entrepreneur Access to Capital Act, as amended and approved by the House Financial Services Committee on October 26, 2011, (see http://financialservices.house.gov/UploadedFiles/hr2930ai.pdf for the original). The amendments are important, since they lower the size of the amount raised. While the situation is still fluid (the House reportedly just passed its bill and the Senate is in draft), it appears that there will be a $1M annual cap on raising money through Crowdfunding. Crowdfunding is exempt from current broker-dealer rules. Other issues, like how companies handle scores or hundreds of investors or allowable fees that Crowdfunding platforms can charge, remain up in the air.

I have heard rumors about this being done in Europe for the last several years, but cannot substantiate that startup companies have been funded this way. Wikipedia reports that “One of the pioneers of crowd funding in the music industry have been the British rock group Marillion. In 1997 American fans underwrote an entire U.S. tour
to the tune of $60,000, with donations following an internet campaign…” And movies have been known to use Crowdfunding. Any readers with more data?

This is a brave new path for the US. While many (myself included) think that our current SEC regulations that limit investments in startups to “accredited investors” are too narrow and should allow other knowledgeable investors to participate, there is established law and precedent for the investment market. I worry that we might be opening Pandora’s box. Many startups fail and investors that are not willing or able to do due diligence should not be investing in them. It is one thing for sophisticated, accredited investors, like me, to invest in a company and loose their investment. We understand the risk going in. We did our due diligence on the management team, the market, and the technology and reached a positive conclusion. It is quite another thing for someone to “advertise” a deal to the Crowd and have people send them money based solely on the company’s information without any substantiation.

I believe that broadening the participation in the early-stage asset class is a good idea and Crowdfunding is one way to achieve this. I just don’t want some bad actors who use the Crowdfunding mechanism for fraudulent transactions to poison the entire asset class. I think it would behoove both the entrepreneurs that raise money with Crowdfunding and the investment community to find a way to have a trusted platform that verifies that the company is who they say they are and that some investment professional has done due diligence appropriate to the investment.

I also worry that Crowdfunding could lead to some very high priced deals. Investment professionals (including “Professional Angels) have a great deal of experience setting the price for early stage deals. This experience comes from many years of investing, forecasting companies’ success and capital needs, and understanding how exits are likely to occur. Without this discipline, prices might not reflect true value. For example, if an entrepreneur is told by the investment professionals in their community that an appropriate valuation for their company is $2M, but they go to the Crowd with a $10M valuation and raise $500k, what happens when they need to do their next round? After they have spent the $500k, they might approach either Angels or VCs who will then set the price well below $10M. The Crowd will then find that their investment is worth very little. If the Crowd understands that risk, I have no problem with Crowdfunding, but if this isn’t transparent or well-disclosed, I think we could have many disgruntled investors.

I really want Crowdfunding to work. I don’t want a bunch of “mom and pop” unsophisticated investors ripped off.

The Economic Crisis

A while ago, I blogged on the decline of Microsoft (http://blog.drosenassoc.com/?p=42). Lately, many people have asked me about the current debt crisis, followed by the S&P downgrade of US credit. There are striking similarities.

Until about 20 years ago, for over 200 years, the US has been in a building mode. We have created the economic engine that fueled world growth, established an education system that was the envy of the world, a climate and legal structure that allowed great entrepreneurs to create companies that were the envy of the world. Even when faced with extraordinary challenges, like the great depression or the world wars, we were able to overcome these challenges.

Just as with businesses, in times of plenty, it is incumbent upon a business (or society) to put aside for the lean times. (I won’t cite Biblical references here, but they are obvious.) Since WWII, we have had numerous times of plenty. In the late 40s and early 50s, as a county we hugely increased our infrastructure (think the Interstate highways), invested heavily in universities (which have been the envy of the world and fueled much of our entrepreneurial growth), and through the concomitant consumer spending, created a surge in our standard of living. Many of these improvements allowed us to weather some of the storms that followed. With confidence, we strode into space – landing on the moon, created the Internet and countless other platforms that fuel global innovation.

But, our generation seems to have lost sight of what is really important. We have spent with reckless abandon. We have made poor strategic decisions. We, as a society and management team (the political leaders we elected) made bad strategic decisions. If we were a company, our stock would be trading at record lows and our investors would be clamoring for a change of leadership. But we have lacked the will and foresight, not to mention the systemic governance issues that prevent truly innovative leadership from coming to power. We need to make changes in the way we are run.

We are negligent for not having done this in the US. And, despite politicians’ desire for reelection demanding that they give us a silver bullet, there is no silver bullet! It took 20 years to make this problem – 20 years of lack of political will to curb spending and live within our means. But, just as I suggested with Microsoft, there are reasonable long-term solutions.

From my point of view, the solution is to unleash the entrepreneurial spirit that is embodied in the startups. This is where the economic growth, job creation, and invigoration of our society can come from. In a very specific sense, legislation before congress, like Senate Bill S256 “American Opportunity Act of 2011” (http://www.opencongress.org/bill/112-s256/text), sponsored by Senators Mark Pryor and Scott Brown that gives a 25% tax credit to angel investors; when similar legislation was enacted in other places, dramatic increases in angel investing and increased tax revenues have resulted. Another example are the proposed changes to IRS Section 1202, exemption for gains on qualified small business gains, which will give 100% exclusion of capital gains for angel investment.

These actions will spur angel investing in those high-growth startups that will ultimately move the economy. While modest in cost, they could be large in impact.

University Spin-Outs

I am a big fan of high-tech companies. People that know me (and my co-investors) know that I like companies that are “changing the world” or “creating new industries” through technology innovation. And they know that I believe that research universities spawn great technologies and deserve public support. Universities do a terrific and efficient job of educating students, organizing research projects, getting and managing grants, and investigating science in a way that can make meaningful contributions to society.

I do not believe, however, that universities can do a good job of creating companies from the technologies that they create. This is a fundamentally different skill set than most (if not all) universities have as a core competence. It has been well demonstrated (e.g. Josh Lerner’s book, The Boulevard of Broken Dreams) that most governmental organizations don’t do well in creating or nurturing entrepreneurial businesses.

I do, however, believe that it is a fundamentally good idea to help start companies from university technologies. While the universities play a key role in making this happen, I am disturbed by a trend that seems to be emerging of universities establishing internal angel funds to spin out companies. It is a good idea to give very limited amounts of money and a great deal of support to key university faculty or grad students to help them understand if their technology makes sense to commercialize. Many universities already have small funds that give grants toward this end – something like $25-50,000 to help bridge the gap between pure research and a product or to pair business school students with engineers. But setting up multi-million dollar funds to compete with existing angels and VCs is a really bad idea.

It is really hard to take a new technology, build a company around it, and bring products based on that technology to market. This is something that VCs and, increasingly, angel investors have done successfully for many years.

History is littered with examples. How many states in the US and countries worldwide have decided to create “clusters” for specific technologies so that they could participate in the explosive growth of a new industry? Very few have been successful. Incubators have come and gone, wasting a lot of public money.

I believe that, instead of spending precious resources on trying to take companies from the “research stage” to the “company stage” it is a much wiser course for research universities to work with established financing sources for early-stage companies, like active angel groups. And for governments to help sponsor that collaboration by setting a public policy that incents angels who are willing to put their own money on the line to help create a company.

Many states have now established tax incentives along these lines. The Angel Capital Association has a summary of these activities. (http://www.angelcapitalassociation.org/public-policy/state-policy-kit/ ) This makes much more sense to me than asking universities to replace or augment Angels or VCs.

Severance – Oh No!

Many entrepreneurs, when they take outside money into their company, want to protect themselves. This is a perfectly reasonable thing to do.

The investors putting the first money into the deal also want some protection, especially when the founders own a vast majority of the overall stock and probably have a majority of the board seats.

One of the items that entrepreneurs sometime request is a severance package. In Washington State – DO NOT DO THIS. I don’t know about other states, but in Washington, the law apparently makes individual board members liable for any salary owed employees and not paid. For historical reasons, severance was considered salary in Washington. That would mean that board members might become liable for the severance of a fellow board member and company executive.

Clearly, this is a bad idea and the law needs to be changed.

But in the meantime, do not agree to a deal where there is a severance agreement.

I have modified my model term sheet to reflect this (http://drosenassoc.com/Model%20Term%20Sheet%20for%20Alliance%20of%20Angels%20revised%20May%202011.pdf).

Quebec City Conference on Public Policy on Venture Capital

Last week, I was invited to attend and speak at the Quebec City Conference Public Policy Forum on Venture Capital and Innovation (http://www.quebeccityconference.com/eng/about/about-ppf.php ). It was a presage to the main conference on Innovation. The participants and speakers were all excellent, with the majority non-US, which gave the event a perspective not usually seen in similar events. While I could write at length about each topic (e.g. getting innovation out of universities, supporting industries during times of transitions, and international models), I will focus on some of the insights about the VC model itself.

Starting with a well-tread topic – VC returns, which are negative in the last 10 years, Thomas Hellman of UBC, did some cool analysis of the Thomson/Reuters data which analyzed the returns from US VC funds from inception through 9/3/08, and plotted the ROIs against the percentile of those ROIs. Stunningly it showed that the top 1% of funds had 41% of the total returns, the top 5% had 70%, the top 10% had 84%, and the top 25% had 104%. Several key thoughts follow from this:

  1. 75% of the funds lost money.
  2. If you aren’t in the top 10%, you probably won’t do too well.
  3. LPs are deserting the asset class, if they aren’t already in a top decile fund.

So what does this mean? Clearly the VC industry will continue to contract as the funds that haven’t performed well can’t find LPs. This has been discussed at length elsewhere. At the conference, in the networking sessions, and afterward, I learned more. But, with LPs abandoning any but the most established VC funds, should governments sustain them? Or is the VC model broken? (Those that follow my blog, know that I suggested this a long time ago, http://blog.drosenassoc.com/?p=7).

And.. if you assume that the VC industry will collapse back to the top decile+ of funds, what does that mean to funding early-stage startups? That was one of the major topics of the conference. It was also the reason that angel investing got so much attention! (And, of course, why I was there.)

As I’ve blogged before, it is evident to both governments and policy makers that “high-growth startups,” primarily in tech, healthcare, and cleantech, can propel the economy. Many of the government speakers and participants acknowledged this and are struggling with how to make this happen in their geography.

Many of the policy makers that were present (and many of the VCs from outside the US) seem to believe that angels and angel groups must play a key role, both in financing and helping startups. But what does that mean? The conference participants adopted my term “professional angels” to distinguish between those that make occasional angel investments and those “professional angels” that (a) primarily do angel investing, (b) develop and maintain a portfolio, (c) invest with an experienced discipline, primarily in groups, and (d) help their companies and often serve on boards. A great deal of discussion was how to encourage Professional Angels to invest more and pick up some of the load from the VCs who will disappear.

A number of government incentives were discussed, including tax credits, capital gains holidays, etc. It seems that Canada is well ahead of the US in considering these. Hellman presented the results from some of the BC programs that have worked. When his study is published, I’ll include a reference.

What was also striking was how much the government officials in Canada and elsewhere are looking at the Angel group model in Seattle and wondering how they can duplicate what we have done. As we in Seattle realize that the model needs to be local (we couldn’t just copy the model from the Bay Area), it won’t be simple to extend it to other geographies.

 

Success!!

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.

Rescue of Angel Financing Imminent

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.

Original Proposal New Proposal
Adjust Accredited Investor Thresholds

As originally proposed, would have adjusted the accredited investor financial thresholds for inflation since the thresholds were first set. This would have eliminated approximately 2/3rds of angel investors currently active. In addition, the first proposal would have required an adjustment every 5 years.

Adjust Accredited Investor Thresholds

As now proposed, the net worth standard for an accredited investor will stay at $1,000,000, which is where it is now, with one important change:  net worth will exclude the value of a person’s primary residence.

In addition, the bill would require the SEC to review the accredited investor definition to determine if it should be adjusted. The first review would be within 6 months, and thereafter reviews would be not less than frequently than every 4 years. Significantly, the new language also requires the SEC to consider the economic impact of any change, arguably leaving the door open for a future decrease in the accredited investor thresholds.

SEC Review of Filings

As proposed in the bill approved by committee, would have required the SEC to review all accredited investor offerings within 120 days of the filing with the SEC. If the SEC did not undertake that review in time, states would have been free to impose their own rules.

Disqualifications for “Bad Actors”


Directs the SEC to issue rules for the disqualification of offerings and sales of securities involving individuals who are “bad actors.” “Bad actors” are persons with a prior record of violations of certain federal or state laws.

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.

“Save Angel Investing” Amendment to Senator Dodd’s Restoring American Financial Stability Act of 2010

(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.”

Dodd Bill to go to the full senate

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.