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:
Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner
Updated July 15, 2010 – 3 p.m.
An influential U.S. senator, Sen. Maria Cantwell (D-WA), worked to regulate the perilous use of derivatives by Wall Street bankers, and criticized the Obama Administration in the process. But her derivative strategy worked. The sweeping financial reform legislation will regulate the risky, intangible instruments.
This means derivative trading now faces regulation, and financial institutions will have to set up a fire wall by moving their derivative departments elsewhere.
“This isn’t about poking the White House, it’s about getting capital flowing to small businesses,” Sen. Cantwell said in an interview with Les Blumenthal, a reporter for McClatchy’s Washington state newspapers.
She helped lead the fight against investment bankers, who were bailed out by taxpayers only to shell out big bonuses and who are at it again. Instead of extending credit to business, Wall Street is back to the old tricks of playing risky derivative games that helped lead to Wall Street’s meltdown and the global-financial disaster.
She’s also had a testy exchange with Treasury Secretary Timothy Geithner over the failed efforts to bail out community banks and the associated credit issues faced by her Washington state constituents and other American businesses and consumers.
“We are trying to keep the focus on what needs to be done to get credit flowing and avoid another bubble,” Sen. Cantwell also said. “Do I wish the White House team was more attuned to these issues? Yes.”
Yes is right. It’s commendable that she’s become outspoken about regulating Wall Street’s behavior.
If she’s successful, we’ll see job creation – the only way out of this mess. I’ve been harping about this and asking for answers to questions for an extended period of time starting with this column, “Is it Time to Police Pay at Wall Street Banks?”
And she was right about voting against the reappointment of Fed Chair Ben Bernanke. Few in Congress seem to understand Main Street issues and his tardy, tepid handling of the Great Recession at the Fed.
Firewall partnership
Sen. Cantwell partnered with Sen. John McCain (R-AZ), the former GOP presidential candidate, to bring back the commercial/investment banking firewall. This will prevent risk-taking by commercial banks that exacerbated two downturns in the 1930s and the most-recent financial chaos. The two worked together on the Senate Commerce Committee.
Cash flow and credit are critical for operating a business. With too-few funds available in loans, businesses have been failing or, at least, suffering from bad credit as a result of not having access to capital.
Efforts by the Obama Administration and Small Business Administration to provide more loans are to be commended. However, they are way too-little and too late. Most afflicted small businesses now have poor credit because of the cash cutoffs and they won’t qualify for any the funding.
Credit card regulations were too late, too.
Nothing has been done to help repair the credit of the millions of small businesspeople and consumers who were victimized by the credit card companies – domiciled in a handful of states that permit predatory behavior – their rapacious interest rate hikes for bogus reasons and slashed credit lines.
Sen. Cantwell also indicated her disappointment that the Obama Administration twice reneged on promises for action on the proposed firewall between commercial and investment banks.
“Their economic team is not living up to what they said they would,” she explained to Mr. Blumenthal.
Hmm. Broken promises? That’s not what America needs, but we can appreciate Sen. Cantwell’s candor and successful efforts.
From the Coach’s Corner, on another somber note regarding credit: Customers of the hospitality industry are ostensibly the No. 1 target of hackers, here’s the article.
