How Sen. Dodd’s Financial Reform Almost Killed Financing of Startups



On the surface, former Sen. Christopher Dodd’s financial regulatory bill seemed like a good idea in 2010.

After the monstrous financial meltdown with far-reaching consequences, most Americans probably supported 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,” were upsetting to businesspeople — including me.

ID-100208147stockimagesIt raised red flags about startup funding.

A salient theme of this Biz Coach portal has been advocating policies for a healthy economic environment and creation of jobs.

Growth of the U.S. economy depends heavily on the formation of new businesses.

Also alarmed were angel investors, who 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, had provisions that would have stifled financing of startups that have the potential to attract investors.

Angel investors

Marianne Hudson, the executive director of the Angel Capital Association 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.”

Also at the forefront of the offensive to persuade Sen. Dodd to amend his financial reform bill was Joe Wallin, who was a partner at Davis Wright Tremaine LLP in Seattle (now a principal at Carney Badley Spellman P.S. He was one of two Seattle attorneys who worked feverishly to kill the bill. (Mr. Wallin’s bio.)

The other was Bill Carleton, a member of McNaul Ebel Nawrot & Helgren PLLC.

In an excerpted interview, Mr. Wallin explains his concerns:

Q: What would have been 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 would have been 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 was 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 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.

From the Coach’s Corner, here’s more on financial reform and two articles with valuable tips from an angel investor:

Fair-Value Accounting Standards Aren’t ‘Fair’ — Stanford Professor — Transparency became a priority following all of the shenanigans that led to the financial crisis and the Great Recession. Banks drew fire because they used traditional accounting principles in order to downplay their huge losses from junk mortgages. The banks valued their financial assets on their original costs. That was problematic but reforms are unfair, according to a Stanford University accounting professor.

How to Attract an Angel InvestorNow that a UNH study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? An angel investor offers seven tips.

Angel Investor: Tips for Increasing Cash Flow, Profits — A successful angel investor shares his tips for good cash flow and other profit issues. 

“Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.”

-Peter Drucker

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Photo courtesy of stockimages at www.freedigitalphotos.net


Seattle business consultant Terry Corbell provides high-performance management services and strategies.