Tucked away in a few pages in the comprehensive financial reform bill outlined by Senate Banking Committee Chairman Senator Dodd (D-Conn.) are provisions that would raise the costs of angel investments in startup ventures. These provisions are both unnecessary and unhelpful at a time when policymakers should be looking for ways to make it easier to finance new businesses, especially the potentially high-growth, job-creating companies capable of attracting outside investors.
Under existing law, startup companies can raise money easily and quickly from "accredited investors" -- individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.
All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.
The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be "accredited."
It is difficult to know why these provisions are in a much larger bill whose primary aim is to address the fundamental causes of the recent financial crisis. Those causes are now well known and much commented on: excessive subprime mortgage lending combined with excessive leverage throughout the financial system. There is no evidence that angel investment in startup companies played any role whatsoever in events leading up to the financial crisis.
Various studies published or sponsored by the Kauffman Foundation have made it abundantly clear how dependent the U.S. economy has been and will continue to be on the formation and growth of new companies. Angel investors are important funders of new companies. There is no good time to make it more difficult for them to invest in startups, and now -- when the economy is struggling to recover from what may be the deepest recession since the Great Depression -- is the very worst possible time to discourage angel investment.
As the Dodd bill moves through the Congress, one hopes that Section 926 will be removed.
Robert E. Litan is vice president of research and policy at the Kauffman Foundation.
The smallest start up businesses that are funded by their founder's savings will not be able to raise additional capital and their chance of succeeding just went down another 50%.
Larger small businesses will have zero access to capital and therefore will never be started or they will be forced to move offshore.
It should be obvious to anyone paying attention that this administration is going to do whatever it can to eliminate any kind of initiative.
Small business is the economic engine that has driven this country. Adding layers of laws, and waiting times (???) shows just how out of touch Dodd and DC are about the real world. 120 days to review an application so I can ask an angel for money ????? And what value has that brought to the table?!
This tells me they have never set foot in Silicon Valley and understood anything that goes on there. Never. Pathetic.
He might have set the tax at some reasonable level like double the qualification but take away just 25% of that value to show the government (that is to say the representatives of the people) that this will accomplish two advantages: 1. Money will not be invested unless the Angel is really certain that this idea is a winner! and,
2. The tax will give the investor confidence that the government may choose to support the same idea!
Eventually, the government will have to be the only Angel, so it needs to have this form of expert help to learn how to do it. Of course, this will be very profitable to the government and reduce the need for future tax increases elsewhere!
As a company who is close to seeking an Angel Investor to help develop our company, Consciously Hip into a lifestyle brand with many other products, the idea of having to involve the government as an additional "step" into this process is not only daunting but quite frankly irritating.
Our goal is to stay positive in this world and we just tossed out a negative comment, but sometimes you just have to put yourself out there.
It is hard enough being a business owner, especially in this ecomomy, but to muddy up the waters for those who are willing to share their life boat with you to steer you through the waters of entrepreneurship, well, that is just crazy talk.
Angel Investors are an absolute positive in this world to small and mid size business. If we start bogging down their process and their freedom to do with ther money what they choose, we will all have a much harder road ahead.
The problems include:
1. By doubling the thresholds required for investors to be accredited:
--the bill drastically decreases the pool of individuals from which entrepreneurs can raise funds.
--fewer firms are likely to be formed, and most importantly, fewer firms formed by individuals from families that are not of means. People from lower and middle income families will find it much harder to find capital as a result of this bill.
2. By establishing a SEC filing requirement, the costs of raising capital will increase. As funds raised from angel investors is often quite small, this is likely to render many transactions too costly to justify funding.
4. Many startups raise funds from equity investors to meet an immediate cash need. Waiting 120 days for SEC approval may force these firms into bankruptcy. This is particularly true as it takes time for entrepreneurs to locate investors. For many, this requirement would most likely mean raising equity capital may take more than 6 months.
What is bizarre about this proposal is that it is not clear what problem Sec. 926 will fix. Sec. 926 appears to be a proposal with problems, with no benefit.
I wonder what would be the nature of the SEC review, and who would train the SEC. Angel investing is VERY different from the areas that the SEC currently regulates.
And how would the federal government enforce this? Big brother, anyone?