Why Startups Get a Reprieve from Financial ‘Reform’
Updated May 24, 2010
As House and Senate conferees debate their differences on the financial regulatory reform bill before Congress, the angel investment community and entrepreneurs are celebrating – thanks, in part, to two Seattle attorneys.
At first, it appeared no one was listening. The financial regulatory reform bill was advancing through the U.S. Senate. But Sen. Chris Dodd’s bill was flawed. It threatened job creation by restricting startups and angel investors.
Thankfully, the provision hurting startups was deleted by amendment just before passing the Senate.
“It would have hurt angel investing and would have wiped us out,” says attorney Joe Wallin, a partner in the Seattle office of Davis Wright Tremaine, www.dwt.com.
He and another Seattle attorney, Bill Carleton, a member of McNaul Ebel Nawrot & Helgren, labored with others to kill the provision affecting startups and their ability to attract angel investors for job creation. It resulted in an amendment, SA 4056, which was co-sponsored by Senators Maria Cantwell and Patty Murray (D-WA) and others including Sen. Dodd.
“Congratulations to Marianne Hudson of the Angel Capital Association, and Dan Rosen of the Seattle Alliance of Angels!” exclaimed the attorneys in a statement. “Thank you Senators Murray and Cantwell!”
So the bill would have mandated that unemployment would continue as a bigger economic threat than it needs to be.
“Over the next three years, the economy must create nearly 13 million jobs to bring unemployment down to 5 percent – still higher than pre-recession levels,” wrote economist Dr. Peter Morici in an Op Ed column on this site. “That requires 360,000 jobs every month and economic growth at 5 percent a year.”
And credit lines for small businesses as catalysts for new jobs are still not widely available via the normal pipelines.
“Obama spent the TARP to bail out Wall Street banks, GM and his pals at the United Autoworkers but left the 8,000 regional banks to sink or swim,” Dr. Morici added. “Cash strapped, those banks can’t lend enough to small and medium-sized businesses, which create most new jobs.”
That’s another reason why a heavy economic burden falls on startups and others in the angel ecosystem. SA 4056 was imperative for the financial regulatory reform bill.
“It could have reduced funding for small companies by probably $10 billion per year,” Mr. Wallin adds. “Small companies are the source for new jobs.”
In a March 28, 2010 column, “How Sen. Dodd’s Financial Reform Would Hurt Financing of Startups,” I quoted Ms. Hudson of the Angel Capital Association, who forecast the bill would prevent up to “77 percent of accredited investors” from investing in new firms. In that column, Mr. Wallin explained why the financial regulatory reform bill contained flaws.
“Before companies could accept money from investors they would have to file paperwork with the SEC and wait 120 days,” Mr. Wallin told me in that interview.
“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,” he explained.
After the reprieve for startups, to confirm what’s been at stake, the attorney cites data from the University of New Hampshire Center for Venture Research. The report is entitled, “The Angel Investor Market in 2009: Holding Steady but Changes in Seed and Startup Investments.”
Even in a down economy, of course, we’re talking big numbers.
“Total investments in 2009 were $17.6 billion, a decrease of 8.3 percent over 2008 when investments totaled $19.2 billion,” wrote Jeffrey Sohl, director of the school’s venture research center.
“However, a total of 57,225 entrepreneurial ventures received angel funding in 2009, a reserved 3.1 percent increase from 2008 when 55,480 entrepreneurial ventures received angel funding. The number of active investors in 2009 was 259,480 individuals, virtually unchanged from 2008’s 260,500 individuals,” he added.
He said the average deal size was reduced by 11.1 percent in 2009.
“Software accounted for the largest share of investments, with 19 percent of total angel investments in 2009, followed by healthcare services/medical devices and equipment (17 percent), industrial/energy (17 percent), retail (9 percent) and biotech (8 percent). “Industrial and energy investing is a significant increase from 2008, reflecting a growing appetite for green technologies,” he said.
He indicated 54 percent of the exits stemmed from mergers and acquisitions. Forty percent involved bankruptcies.
So, all is well as normalcy returns to the startup-funding process. But one has to wonder why all this political maneuvering was necessary.
From the Coach’s Corner, the Silicon Valley has some good news following another law firm’s survey: Venture funding improves for some startups.
