By Allan Maurer
WASHINGTON, DC – The financial reform bill now being debated in the U.S. Senate could throw a monkey-wrench into the early-stage startup funding process. Two provisions in the bill, which is supposed to be aimed at taming Wall Street, would adversely affect “angel” investors, the high net worth individuals who often seed early stage companies.
Those provisions in the proposed “Restoring American Financial Stability Act of 2010” (S. 3217) could limit the availability of angel investment to small business and start-ups, says CompTIA, the IT trade industry.
One of the provisions increases the amount of income and assets an angel investor would need to qualify as accredited investors. The other requires a company seeking an angel investment to seek U.S. Securities and Exchange Commission approval–a process that could take months.
Many early-stage startups simply do not have those extra months and might never get off the ground if the provision is included in the final bill, some angel investors say.
Startups are job creation engines
“We recognize that this proposed legislation seeks to address the myriad of complex issues that led to the financial crisis,” said Elizabeth Hyman, vice president, public advocacy, CompTIA, one of at least ten associations requesting amendments to the bill to change the provisions.
“We are concerned that certain provisions contained in this legislation would effectively cut off early-stage angel investors who provide a critical source of funding for start-ups, small businesses and other entrepreneurs,” she stated. “Access to capital continues to be a significant concern for all small businesses.”
In an opinion piece about the financial reform bill in on Philly.com , Steve Welch asks why Washington bureaucrats cannot seem to distinguish between Wall Street bankers and entrepreneurs and the angel investors who back them. He notes that the bill in its current form “Will hurt the process that helps turn entrepreneurs’ innovateive ideas into viable, job-creating businesses.
Getting SEC involved “Almost a joke”
We understand his pain. For some reason, legislators seem clueless about how important startup funding is to getting the country back on track in creating new jobs. We spend billions to bail out firms responsible for the financial meltdown while doing little to rein in their excesses or help the part of the economy that is at the root of real job creation.
Bill Warner, of Wake Forest, NC-based Paladin and Associates, tells us, “These provisions in the Dodd bill will substantially stifle investment in startup companies.”
He adds, “Getting the SEC involved is almost a joke. These folks are one of the many who never blew the whistle on the pending mortgage industry collapse and they knew it was coming. Getting them involved in deciding what the risk is in an angel investment adds no value to the process and will only slow down investment.”
Welch points to the Kauffman Foundation study that found that between 1980 and 2005, companies less than five years old created nearly all the net gain in new jobs. But, Welch notes, that rather than supporting the effective bottom-up economic development, Washington legislators continue to focus on “mis-guided top-down policy making.”
Amendments requested by CompTIA and others
In a letter sent to Chairman Christopher Dodd and Ranking Member Richard Shelby of the Senate Committee on Banking, Housing, and Urban Affairs, CompTIA has asked for two amendments to the bill:
* Section 412: As written, this section would increase the threshold for qualified investors by applying the inflation factor measured since these limits were first enacted. Applying this inflation factor would more than double the existing net asset requirement from $1 million to approximately $2.3 million.
CompTIA supports an amendment that would keep the existing $1 million cap, but would exclude the value of the investor’s primary residence.
* Section 926. The section would require a 120-day SEC review of all Regulation D 506 private offerings, which include angel investors. However, instead of adding an additional 120 days onto the funding process, CompTIA supports an amendment that would simply disqualify “bad actors” as determined by Federal and State authorities.
“These amendments will ensure that high growth small businesses and entrepreneurs have access to a strong pool of angel capital and that investors are better protected from fraud,” said CompTIA’s Hyman.
Supporters of these provisions say they are intended to protect angel investors from risky investments. Welch says it’s true that angel investing is risky, but “Calculated risk-taking has allowed the United States to become the most innovative society in the world.”
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