iOS app Android app More

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Proposed 'Protections' for Angel Investors are Unnecessary and Will Hurt America's Job Creators

What's Your Reaction:

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.