Our law makers have come to their senses! Innovation in America has been granted at least a four-year reprieve, thanks to the far-sighted efforts of a bipartisan group on the Senate Banking Committee. Wow, what a revelation! The government actually listens to their constituents!
In my latest blog, I mentioned some troubling provisions in Senator Chris Dodd’s (D-Conn.) financial reform bill that would have subjected private offerings to angel investors to burdensome SEC review and state regulatory compliance obligations. Among other things, these provisions would have drastically raised the $200,000/year income and $1 million net worth thresholds for angels to qualify as “accredited investors,” which assures private offerings to such persons critical exemptions from federal and state securities laws.
From the standpoint of the Capital MatchPoint, whose business is focused on aiding creative startups by matching them to accredited investors, the prospect was sobering. Since startup businesses, particularly in risky technology fields, generally do not have access to traditional bank financing, the addition of potentially tens or even hundreds of thousands of dollars in legal and compliance costs as well as 120 days or more of delay to the angel funding process could have devastated innovative startups and job creation at a time of 9.9% national unemployment.
Fortunately, Senate Amendment 4056, approved by the Banking Committee on May 17, while not a perfect fix, largely removes the problematic anti-angel Sections 412 and 926 of the Dodd bill. For this we have to thank Senator Dodd himself, as well as Senators Scott Brown (R-MA), Maria Cantwell (D-WA), Mark Warner (D-VA), Kit Bond (R-MO) and Mark Begich (D-AK), although the real heroes were the startups themselves who nationally petitioned our elected representatives to remember our critical role in the economy at a time of worldwide economic crisis.
S.A. 4056 gets rid of the SEC review requirement and threat of exposure to state securities compliance requirements and keeps the accredited investor income and net worth thresholds fixed at their current levels for a period of four years, after which they will be subject to SEC review and possible adjustment. This eliminates the immediate danger to startup funding.
The Senate sponsors of the amendment hit exactly the right note: whatever went wrong with Wall Street in 2008, startups and angel investors had nothing to do with it, so the government should lay off. However, at the same time it is disconcerting to realize how close we came to killing the goose the lays the golden eggs. Venture capitalists are few and highly selective; small angel investments are the primary vehicle for injecting seed capital into startups. How many future Googles, Facebooks and Microsofts might never have gotten off the ground? How much precious development money would have padded the pockets of securities lawyers? Fortunately, our citizen-capitalists were on the ball.