How Sen. Dodd’s Financial Reform Would Hurt Financing of Startups
March 28, 2010
On the surface, Sen. Christopher Dodd’s financial regulatory bill seems like a good idea. After the monstrous financial meltdown with far-reaching consequences, most Americans probably would support a strong consumer protection agency and measures to prevent systemic risk.
However, portions of the 1336-page bill, “Restoring American Financial Stability Act of 2010,” are perplexing.
Perhaps it’s my antenna. A central theme of The Biz Coach column has been advocating policies for a healthy economic environment and creation of jobs. Growth of the U.S. economy will depend heavily on the formation of new businesses. Angel investors play a salient role in the development of new firms.
Economic growth is exactly what policymakers should promote. But the bill, supported by the Obama Administration, has provisions that would stifle financing of startups that have the potential to attract investors.
Marianne Hudson, the executive director of the Angel Capital Association has indicated her concerns:
- Section 412 and 413, “Adjusting the Accredited Investor Standard for Inflation,” would prevent up to “77 percent of accredited investors” from investing in new firms.
- Section 926, “Authority of State Regulators Over Regulation D Offerings,” would complicate the raising of funds from “different states, make it unclear what entities regulate angel investments, and introduce potential lengthy waiting periods for businesses to receive their capital, possibly resulting in the death of those businesses.”
In a letter to Sen. Dodd, she listed a full slate of concerns and made several recommendations.
Two Seattle attorneys who work for competing firms are also at the forefront of the offensive to persuade Sen. Dodd to amend his financial reform bill. They are Joe Wallin, a partner at Davis Wright Tremaine LLP, and Bill Carleton, a member of McNaul Ebel Nawrot & Helgren PLLC.
They are circulating a petition to Stop The Repeal of Federal Preemption of Reg D Securities Offerings.
Here’s an interview with Mr. Wallin:
Q: What are the current rules?
A: The current rules allow companies to raise money from accredited investors with no advance filing with the SEC or any state securities regulators. All that is required is a simple notice filing and a small fee after the closing of the financing.
Q: What would be the new rules?
A: Before companies could accept money from investors they would have to file paperwork with the SEC and wait 120 days. If the SEC didn’t review the filing and conclude that the filing qualified for the federal securities law exemption, companies would have to file paperwork with the states in which the investors lived and wait for the states to determine that the sale of the securities qualified for the securities law exemption.
Q: What are the impacts?
A: Huge delays that will be very harmful to companies and job creation. YouTube was created from scratch and sold for billions in less time. The vibrancy of our early stage companies and their ecosystem would be destroyed.
Q: What is the timeline for the bill?
A: Passage is expected before November.
Q: What might be the motive for such legislation?
A: Federal legislators are reacting to frauds like the one Bernie Madoff committed. State securities regulators want more power to regulate early stage company security offerings in the hopes of preventing frauds.
Q: What do you recommend for readers who might be adversely affected?
A: Call your congressman or congresswoman every day and voice your opposition. The government is about to destroy one of the most positive aspect of our economy.
Q: What else would you like to add?
A: A big theme for the Democrats is returning power to the states so that the states can make their own rules for businesses and not be stuck with federal rules that they might not like. This might make sense in certain circumstances but I don’t believe this is one of them.
Resource links:
- Mr. Carleton’s blog.
- Mr. Carleton’s bio.
- Mr. Wallin’s bio.
- From Sen. Dodd’s Web site, here are the specifics of his proposal – bill summary, section by section, bill text
From the Coach’s Corner, to benefit entrepreneurs, a noted angel investor provides numerous important tips in these two Biz Coach columns:
Why Women Receive Less Angel Funding Than Men
You’re a woman with a great business idea, but you’re short on funds. You’ve also heard that it’s tough for female entrepreneurs to get financing from an angel investor – someone who funds early-stage companies.
Ironically, female entrepreneurs receive less angel funding than men, even though they launch more businesses, according to a study co-authored by a finance professor, Dr. John Becker-Blease, at Washington State University, Vancouver, www.vancouver.wsu.edu.
The study is entitled: “Do women-owned businesses have equal access to angel capital?”
Dr. Becker-Blease conducted the study with Dr. Jeffrey E. Sohl, who directs The Center for Venture Research at the University of New Hampshire, www.wsbe.unh.edu/cvr, in 2007. Dr. Becker-Blease formerly worked at the center prior to joining WSU where he researches entrepreneurship, corporate governance and women in business.
What is their study’s first insight on why women receive less angel capital? Fewer women than men actually apply for angel funds.
For those who do apply, Dr. Becker-Blease reminds us that investors aren’t interested in backing small retail-type micro-businesses.
“We found that women entrepreneurs submitted an average of nine percent of proposals received by our angel groups during the sample,” he said. “Indeed, of the proposals received, both women and men had an equal chance of receiving funding (about a 14 percent chance).”
Here is an excerpt of the interview with Dr. Becker-Blease:
Q: At what rates do women start business vs. men?
A: The rate of increase in the number of businesses in which women were at least 50 percent owners is quite a bit higher than the increase in men-owned-businesses. The National Foundation of Women Business Owners reports a 17 percent increase in the number of women-owned firms between 1997 and 2004, compared to an overall increase of only nine percent in the total number of firms.
Q: Why do fewer women seek capital than men?
A: Three possible answers. 1. Women entrepreneurs are not interested because the kinds of businesses they tend to start such as retail and service businesses are not the type that most angel investors care to fund. 2. Women entrepreneurs do not know who to ask or how to go about seeking capital. This is a by-product of their network composition. Most angel investors tend to be men (roughly 90 percent) and since women entrepreneurs are not typically part of their network, women do not know how to contact these angels. 3. There is discrimination, or perceived discrimination, in the angel capital market against women and therefore only those women with the best networks or those with the most promising business ventures will find it worth their time and effort to seek angel funding. I should note that we do not find evidence of discrimination.
Q: Why are women likely to seek funds from women angels?
A: It is not simple for the average entrepreneur to find an individual or group of individuals who are willing and able to provide two or three hundred thousand dollars worth of equity capital. Instead, angel investing appears to occur primarily within fairly closed networks.
Homophily is the tendency of individuals to interact with others who are similar to themselves, and sex-based homophily can be particularly strong. We do find strong evidence of homophily in the seeking of angel capital; men appear to seek funds from angel groups comprised disproportionately of men and women appear to seek funds from angel groups comprised disproportionately of women.
Q: How do women entrepreneurs fare compared to men in receiving funds?
A: The data suggest about the same. We have some evidence that angel groups that invest in a relatively high proportion of women-owned-businesses tend to invest more funds than other angel groups. This may be due to the kinds of businesses these groups fund, the stage of the investment, or just a quirk in the data.
Q: Why is so little known about women receiving private equity investors?
A: From the supply-side, since angel investors are not organized around a formal market, researchers have difficulty identifying them and even when we do, many angel investors are reluctant or have such heavy demands on their time that they cannot participate in academic studies. From the demand-side, identifying serious aspiring entrepreneurs, especially those in the kinds of industries that angel capitalists tend to invest in (that is, high growth) is perhaps even more challenging.
Q: What other data did you uncover?
A: As an interesting aside, in a current project that Jeff and I are working on together, we find evidence that angel groups comprised disproportionately of men accept a higher proportion of women-sponsored proposals than do angel groups comprised disproportionately of women.
Q: What questions did your research leave unanswered?
A: We need to examine much more carefully the demand-side of the market. Why are there so few women entrepreneurs who seek funding? For a given level of quality of proposal, are men and women equally likely to receive funding?
Q: What advice would you offer women entrepreneurs seeking funds?
A: There is a growing awareness that women entrepreneurs may face added challenges in acquiring early-stage equity financing. This has led to the creation of women-focused angel groups such as The Women’s Investment Network in Portland, Oregon, which is part of the Oregon Entrepreneurs Network, www.oen.org, or the Seraph Capital Forum in Seattle, www.seraphcapital.com. Make use of their resources and any forums offered.
Well put.
From the Coach’s Corner, here’s more angel-funding advice from an expert who warns that many novice women entrepreneurs underestimate the marketplace:
“Tell women entrepreneurs they’ll encounter major competition,” said Neil Delisanti, who retired as a counselor with the Small Business Development Center in Tacoma, WA, www.tacomabusinesscenter.org, and as a business professor at University of Puget Sound, www.pugetsound.edu. “Advise them to assess their strengths and weaknesses to determine their competitive advantages, and to develop operating strategies.”
Delisanti said he’s observed some women are too empathetic to customers, but are more organized than men in financial and other administrative matters.
For information on raising capital in turbulent times, visit: What No One Tells You about Raising Investment Capital