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:
