Senator Dodd Reform Bill Could Ruin Angel Investing

Congress has not been friendly to startups this past decade.<p>A few results of their well-intended efforts:<p>1. Startups today have little or no realistic hope of gaining liquidity through an IPO, leaving them in a position where M&#38;A is their only realistic exit, with the result being that valuations are lowered for founder exits (the consequence of Sarbanes-Oxley, among other new laws).<p>2. Startups today can't simply price their stock based on the reasonable business judgment of a board of directors, nor can they use a simple 10 to 1 ratio in pricing their preferred versus their common stock, but must instead incur significant expense in having to do independent outside appraisals just to take simple steps such as issuing stock options (the new 409A statute and accompanying regulations have brought this about).<p>3. The VC market has been all but dead for the past two years, owing in no small part to congressional actions that helped fuel the Fannie/Freddie subprime mess, leading to a financial meltdown.<p>4. Add to this the hammer that is about to fall on angel funding as reflected in the Dodd bill, and startups will not only have their VC funding sources largely dried up but will have far more restricted access to early-stage funding across the board. In practical terms, this will mean that funding activities will need to be based on: (a) having access to comparatively wealthy angel investors (maybe 25% of the current pool) while being prepared to incur significant delays in getting funds pending a minimum 4-month wait; or (b) relying on Section 4(2), which is the section of the 1933 Securities Act that offers an exemption from registration for private placements but without benefit of the safe-harbor approach of Regulation D and its rules relating to accredited investors (the equivalent of "walking on the high wire without a net").<p>Maybe any given point above is over-simplified or overstated but the broad pattern is clear. No individual item is ruinous but each contributes to costs and restricts options. It is not a good trend for startups.

&#60;rant&#62;I am amazed at the things people find important enough to take action on -- or not.<p>Seems to me, just guessing, can't be sure, but a bill that has these things in it should be the #1 item on HN, and we should be organizing as a community to stop it. I don't care what your politics are, this is a political thing that needs to be stopped.<p>Parallel Haskell is awesome and all, and goodness knows I want to hear more about Apple and Flash, or linux, or iPads, or Adobe, or browsers, or Jon Stewart's jokes last night, but this is real, live stuff that could impact anybody with a startup.<p>If the Philadelphia news ran a story "Philly on fire!" people would come out to try to put the fire out. HN runs a story "VC investing seriously challenged!" and you can hear the crickets chirp.&#60;/rant&#62;

For the full text see <a href="http://www.google.com/search?q=%22minimum+interference+from+regulators.+The+law+requires+only+that%22+site%3Awsj.com" rel="nofollow">http://www.google.com/search?q=%22minimum+interference+from+...</a><p>A good official house editorial, it discusses the more likely worse regulatory aspects before getting into the mandated new worth threshold increase.

Have I missed a runaway profusion of investment scams targeting people with net worths between 1 million and 2.3 million? The perceived need for this just perplexes me.

This article leaves out that along with moving the net worth from 1 to 2.3 million for accredited investors, they are also not allowing primary residence to be counted anymore, which for many people is a large part of net worth.<p>The SEC filing for startups is insane. The last thing we need is further roadblocks and delays for early stage startups.<p>PG, would this affect y-combinator? YC is the first investment for companies in your portfolio. Would they have a 120 day delay? Four months is a long time in startup land. This would certainly give a head start to bootstrapped companies.

Wow, the economy is stumbling and the only way out is innovation and now they are trying to make it harder to start a company. Just how do they propose we get the economy back on track? Sorry printing more money is not a long term solution to economic recovery. It amazes me that our elected officials have zero grasp of how the economy works. These are supposedly educated people and yet they consistently treat the economy like some grade school battle for teacher's pet honors. Sorry for the rant but crap like this makes me question the viability of our current governing system.<p>As @rmaccloy I'm not against the idea of bank reform but these types of provisions and attachments to bills are causing so much waste and then we wonder why we have such a huge deficit.

Some past posts on this issue:<p><a href="http://www.avc.com/a_vc/2010/03/startups-get-hit-by-shrapnel-in-the-banking-bill.html" rel="nofollow">http://www.avc.com/a_vc/2010/03/startups-get-hit-by-shrapnel...</a><p><a href="http://www.huffingtonpost.com/robert-e-litan/proposed-protections-for_b_511284.html" rel="nofollow">http://www.huffingtonpost.com/robert-e-litan/proposed-protec...</a><p>I'm surprised this hasn't been brought up more on HN. I'm not against bank reform, but these provisions seem clearly detrimental to prospective founders without providing any actual protections to people who need them. Correct me if I'm wrong...

If someone's going to make this case, could they please do so from somewhere without a paywall and if at all possible, from a source who's logic is more honest than "are republicans or democrats in office right now"?<p>IF the claims are correct though, then that needs to be fixed in the bill, particularly the part about filing with the SEC.

If Congress wants to help the economy they should go in the opposite direction: don't increase the accredited investor threshold, remove it.

Oh, for fuck's sake. We're not hurting for a lack of angels because of the accredited investor rules. We're hurting for a lack of angels because there aren't a lot of people who are willing to cut checks to young companies without revenue after other people they know said no. Jacking up the minimum threshold to $2.3 million from $1 million (assuming this passes in current form, <i>which it won't</i>) is a complete non-event for almost every founder.