Category Archives: Legislation

Startup Finance and Dodd Bill – follow up

On my last post, I referenced Scott Shane’s data. For those that haven’t read his book, The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By (http://www.amazon.com/Illusions-Entrepreneurship-Costly-Entrepreneurs-Investors/dp/0300158564/ref=sr_1_1?ie=UTF8&s=books&qid=1269045575&sr=8-1) – it’s an important book for angel investors.

He has now published an article in Business Week that gives more detail on his insights and calculations of the impact of Dodd’s unintentional assault on angel investing (http://www.businessweek.com/smallbiz/content/mar2010/sb20100318_367600.htm).

Bills of the magnitude and length of Dodd’s financial reform bill achieve many important reforms, but it cannot be allowed to pass in its current form and cripple something that is both vital and working, like angel investing.

Opposition to Sections of Senator Dodd’s Financial Reform Bill that will Hurt Angel Groups and Financings

This open letter was sent to Senators Murray and Cantwell, Secretary Locke, and Representative Inslee. Please feel free to forward this to any other Senators or Representatives.

I chair the Alliance of Angels in Seattle. We are a not-for-profit group of over 60 individual and small institutions that invest in early stage startups in the Pacific Northwest and are one of the most active angel groups in country. In the last 3 years (2007-2009), we have invested $7.3M, $16M, and 17.5M in 44, 36, and 29 companies respectively. In almost all cases, we were the primary source of financing for these 109 new companies. The Alliance of Angels has been widely recognized for the benefits it provides to the community, to startups, and for potential economic development these startups bring with their new and innovative products and services.

I believe that Sections Sec 412 and 413 (pages 380-381) and Sec 926 (pages 816-819) of Senator Dodd’s Financial Reform Bill will have a significant negative impact on Angel investing, and might even cause groups like ours to no longer be able to function. While I applaud many of the goals of Senator Dodd’s bill that lead to better visibility and accountability, the three sections cited will have many unintended and disastrous consequences. This cannot be allowed to proceed.

Section 926, entitled “Authority of State Regulators Over Regulation D Offerings” (pages 816-819) is the most problematic. Today, startup companies can raise money from “accredited investors” like the Alliance of Angels simply and easily. As a result, we have funded over 100 new, innovative, and high-growth companies. Senator Dodd’s bill will force these startups to have to make a filing with the SEC and the SEC will have 120 days to review the filing. And then, if the review doesn’t happen, the individual states could then apply regulation. Section 926 will replace an accepted and working system with one riddled with uncertainty and delay. For a startup, a 120+ day delay in financing is often a death sentence. From an investor point of view, many Angel investors, recognizing the increased risk of failure from this added costly and burdensome regulation, might make the difference between continuing support of the entire early-stage investment asset class.

Furthermore, an added layer of state regulation over angel financing that currently works well will put a chill on angles syndicating deals across state lines. At this time such regulation is as unwise as it is unneeded. At the Alliance of Angels, we consider deals from across the Northwest (Washington, Oregon, Idaho, and Montana). If there is additional cost or restriction or time required, co-investment by angels in other state will be chilled. We need more angel investment, not less.

Lastly, Section 412 of the bill will change the definition of an “accredited investor,” adjusting this for inflation. Currently, and accredited investor must have net worth over $1 million or income over $200,000 ($300,000 for a couple) in the current year. People with this net worth or income are sophisticated financial investors. Do they need additional regulation to protect themselves from investing in startup companies?

According to Scott Shane, if you use a database on wealth from the IRS and calculate inflation based on information from the Bureau of Labor Statistics, the new thresholds for accredited investors would be $2.2 million in net worth, $450K in individual income ($775K in salaries for married couples). I believe that this will cripple groups like the Alliance of Angels and would cause a significant drop off in angel financing for startups.

In summary, “it’s not broke, so don’t fix it!” Angel investing in the United States has sufficient safeguards and does not need these provisions in Senator Dodd’s bill to make it safer. Instead, it will put a chill on the entire angel investing process, injecting uncertainty, excess costs and more risk. Please take whatever actions you can to make sure these provisions are eliminated from the bill.

Senator Dodd’s attack on Angel Investing

Senator Dodd decided to take on an overhaul of banking regulations. In his massive 1300+ page bill (http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf), he has slipped in an attack on angel investing. It would impose burdensome and unnecessary new legal and regulatory requirements on startup companies raising angel financing. A recent post by Joe Wallin and Bill Carlton on TechFlash (http://www.techflash.com/seattle/2010/03/congress_attack_on_angel_financing.html) outlines the issues.

My comment:

The Alliance of Angels, through it national trade association, the Angel Capital Association, has been lobbying against similar proposals for the last two years. Sen. Dodd’s bill is by far the most serious threat to angel investing in quite some time.

The change in definition of accredited investor will cause many smaller angels to no longer be accredited. Particularly when angels work in groups like the AoA, the amount they invest in a deal might be small. Limited the capital capacity of a group like ours to help “protect our members” is both silly and dangerous.

But as Joe and Bill point out, the most troublesome part of the proposed legislation is inserting a new level of regulation. Many speculate that Sarbanes-Oxley killed the IPO market for small companies by imposing a new layer of regulation and cost on small companies. Sen. Dodd’s proposal to have the SEC and state regulators involved in angel financing is misguided. Very few startups can afford a 120 filing hurdle – they will run out of cash and go under. This is just absurd.

We urge everyone to write both of our Senators and your congress person to have these provisions removed and save angel investing.

Please act now!