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.
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.
Locke, Obama Trade Plan Won’t Work – Economist Morici
An Obama Administration plan to create 2 million jobs and dramatically increase exports is well-intentioned but is unfeasible, according to one of the nation’s leading economists, Dr. Peter Morici.
“The Administration is correct to target China and India but these initiatives don’t address the reasons U.S. businesses don’t sell enough in those countries,” says the economist in referring to China’s currency manipulations and other trade-protectionist practices.
Dr. Morici speaks from experience. He was the chief economist at the U.S. International Trade Commission in the Clinton Administration and currently teaches business at the University of Maryland.
Commerce Secretary Gary Locke will implement the administration’s five-year plan to double exports and create jobs.
It also seeks to accomplish these goals:
- Promote free trade
- Provide more credit for small to medium sized business
- Enforcement international trade laws
“The Commerce Department initiative merely consists of redoubling existing efforts and not addressing the fundamental issues – the undervalued Chinese yuan and high tariffs, and other regulatory barriers that block U.S. exports in much of Asia,” argues Dr. Morici.
“Of course, these initiatives are helpful and could increase net exports by several billion dollars; however, those will not double exports, which now total $1.7 trillion or appreciably reduce a trade deficit of $440 billion caused by $2.1 trillion in imports,” adds the economist. “The trade deficit is likely to grow in 2010 and drag on the economic recovery.”
There are no published cost estimates but it is a multi-billion dollar plan.
It would increase “…Export-Import Bank funding for small businesses from $4 to $6 billion; boosting Commerce Department personnel that assist exporters at U.S. embassies and consulates in China and India; and strengthening enforcement of trade laws and agreements,” Dr. Morici indicates.
“China is the larger and faster growing market, and maintains an undervalued currency that makes Chinese products artificially cheap, whether at the Wal-Mart or competing with U.S. exports in China,” he explains. “It imposes huge tariffs and administrative barriers to U.S. exports. Conditions are not much better in India.”
Dr. Morici says the U.S. imports $330 billion in goods from China but only sells $88 billion in products to the Asian power.
“Without a revaluation in the yuan large enough to end China’s persistent purchases of U.S. dollars, the bilateral deficit is simply not coming down,” he asserts. “Without strong U.S. action to offset China’s currency market intervention, which exceeds $400 billion a year, China simply is not going to change its currency and trade policies, and the U.S. unemployment will stay close to 10 percent or higher.”
I’ve quoted Dr. Morici over the years and sometimes his views conflict with my free-market philosophy. However, he’s right in that something needs to be done to persuade China.
As a management consultant, I recall Mr. Locke, as Washington’s governor from 1996 to 2004, was innovative and practical. He was the nation’s first Chinese-American governor.
As a Biz Coach columnist, I’ve praised him because he implemented two valuable policies that ostensibly are not used today – he wanted consulting projects to be accountable with benchmarks for returns on investment and he implemented priorities in government budgeting instead of just taxing and spending.
So, if anyone in the Obama Administration is astute enough to assess the problems, he’s the one. Let’s pray he’s successful in strategy and implementation.
America is heavily in debt to China. That threatens our national security, and our individual economic and political freedoms. Unless, the Obama Administration is successful in trade, someday soon America’s official currency will be the yuan.
From the Coach’s Corner, have you developed and implemented New Year’s resolutions?
Here’s a link to some thought-inducing leadership questions: Ten Smart Leadership Questions for 2010.