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.
Will Goldman’s Scandal Prompt Cultural Changes on Wall Street?
Updated July 15, 2010 – 3 p.m.
On the same day Congress passed sweeping financial-reform legislation, Goldman Sachs & Co. agreed to pay $550 million to settle fraud charges. The charges accused Goldman of fraud in mortgage investments. That includes $300 million in fines assessed by the Security and Exchange Commission – the largest in SEC history.
The remaining balance of $250 million goes to the victims.
You might recall that Goldman’s mortgage-related investments were designed with participation by a Goldman client, Paulson & Co. Paulson bet those investments would not succeed, and they didn’t.
Goldman is now forced to assess its procedures in such financial mortgage deals. The catalyst was the investments that cost investors nearly $1 billon, but the deal netted Paulson huge sums of money. It was also part of the mega mortgage meltdown that helped to exacerbate the nation’s economic downturn.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, the SEC’s enforcement director.
A federal judge in New York will rule on the settlement.
The case against Goldman gathered steam when a published report added impetus to fraud allegations against Goldman. The Sacramento Bee alleged Goldman secretly worked to dump “billions of dollars in risky mortgage securities and buy exotic insurance” in anticipation of the housing bubble. But the report said Goldman hid its actions from the Securities and Exchange Commission for nine months in 2007 (“Goldman didn’t disclose its subprime mortgage hedges”).
At issue: Opponents eventually proved that Goldman’s gambling was so relevant – investors would not have bought Goldman’s offerings.
The furor over that controversial 2007 mortgage derivatives deal underscores the fear of many Americans that the market is rigged against them because Wall Street is a haven for questionable behavior.
The Security and Exchange Commission’s triumph over Goldman’s handling of the collateralized debt obligation (CDO) in subprime mortgages shows the Wall Street sheriff is back and is flexing some muscles.
Furthermore, Goldman’s failure to disclose that a hedge fund manager, John Paulson, helped select the underlying securities and then bet against them to make more than $1 billion is bad enough.
It’s looked even worse after Bloomberg reported Goldman knew it was under investigation for nine months but failed to disclose the investigation in their financial reports to investors.
Such omissions triggered the shareholder legal action.
The resulting headlines are reminiscent of the financial-greed scandals involving the 1980’s shadowy behavior of convicts Mike Milken and Ivan Boesky, as well as the principals at Enron and Worldcom.
Several questions have arisen:
- Is the SEC action really the tip of the iceberg of upcoming legal challenges?
- Will it lead to a stock market correction?
- Will it end the entitlement attitudes seemingly held by many investment bankers?
- Will it improve the culture in the financial sector?
This case was an ideal situation for New York’s litigious community.
It led to a decline of Goldman shares – 13 percent – as well as the shares of other financial companies trading in CDOs, including Deutsche Bank AG, Morgan Stanley, Bank of America (the parent of Merrill Lynch) and Citigroup.
In addition, a Chicago online publication, ProPublica, reported on questionable bets by Magnetar and allegations of conflicts of interest by the latter three financial firms. Magnetar denied culpability and none of the three banks denied or commented on the allegations.
Indeed, the same day that the SEC acted against Goldman, April 16, a Dutch bank leveled similar charges against Merrill Lynch. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, cited Merrill Lynch in a $1.5 billion CDO.
Sadly, regarding Wall Street’s entitlement attitudes and culture, the consequences might not be severe enough to prompt an attitude adjustment.
Not to be cynical, here’s the bottom-line question: Are there enough moral compasses on Wall Street to put a stop to the chicanery? Probably not.
From the Coach’s Corner, for more on Sen. Cantwell’s efforts, see “Sen. Cantwell Is Right to Question Risky Derivative Dangers, Geithner.”
The Link – Local TV Journalism, Bad Government Policy and Poor Economy
Updated Dec. 18, 2011
Do you ever wonder why the economic climate is unhealthy? Why the unemployment rate is so high? Or why government policies aren’t conducive to economic growth and the creation of jobs?
In essence, the culprits are government, business greed and inadequate coverage from local broadcast journalism.
Government is culpable because of its political theatrics – failure to set realistic priorities and implementation of unnecessary programs – an immature approach to budgeting.
Business greed led to the financial-sector collapse. That includes the behavior of Wall Street, disingenuous mortgage underwriting, the abrupt terminations of credit lines to businesses, and the predatory practices of credit card companies charging huge interest rates and fees for to small businesses and consumers for bogus reasons.
The federal government has ostensibly tried to correct the problems, but failed. Sen. Maria Cantwell (D-WA) has fought risky derivative trading and lending money to small businesses. The GOP claims to want to do something for small business. The credit card legislation hasn’t corrected all the injustices nor has it helped the majority of small businesses and consumers suffering from tepid or low credit scores as a result of the predatory practices.
The tax incentives to create jobs aren’t working because an economic engine, small business, isn’t in a position to do so. Either the businesses still have poor credit or they can’t afford to risk hiring workers. The incentives are just a pittance compared to the costs of a yearly salary, benefits and the risks of having to layoff newly hired workers. Unemployment insurance is too high for them, as it is.
And small business loans aren’t available to credit-challenged businesses. Even if they could get loans, it would only exacerbate the situation because the businesses aren’t making enough money to pay the loans back. They have too few customers. Consumers can’t afford to buy nor do they have the credit to do so.
Healthcare is a related issue. Polls show Americans opposed the efforts of President Obama and the Democrats. But the public officials didn’t listen.
Even Steve Jobs agreed before his passing, according to his biography: Will President Obama listen to Steve Jobs on the economy?
So where does that leave us regarding my premise about the connection – local TV news coverage, dysfunctional government and the economic downturn? Can we agree about the harmful effects of the Great Recession? Great.
How about the power of television? A little later I’ll point out how the power of TV is not being used and why is isn’t relevant.
That leaves the other two – news coverage and more analysis of government policy.
First, let’s consider governments’ refusals to implement best-practices in management and to adhere to transparency standards. These are huge problems and not just at the federal government level.
The state governments of California and Washington are typical examples:
California. Thanks to The Sacramento Bee, we wouldn’t learn “California agencies’ pay cuts hit departments unevenly,” or why. It’s rare for a local TV station to be as enterprising.
In a related matter, California state employees are given wide latitudes for leaves (see personnel policies). But only a third of the state agencies reportedly send certain payroll records to Sacramento. This means records are more costly to maintain, audit and verify such scattered cost centers, vis-à-vis a centralized location.
One also has to wonder about accountability. California state workers already enjoy comparatively high wages and benefits. The accrued vacation time is subject to abuse, especially when an outside watchdog is not allowed access to the records.
Typically, many government managers are afraid of their unions and employees. Last year’s furlough issue typifies the litigious atmosphere and lack of empathy for taxpayers. Government employees are notorious for gaming the system to disingenuously jack up their pensions. Pensions are calculated based on the workers’ level pay before retirement. Plus, California has a $48 billion unfunded pension liability, according to a Pew Study: “California Faces Challenges in Managing Bills Coming.”
So, it’s necessary to centralize the recordkeeping, and it would make it easier to check such records. When Californians are struggling in an era of high unemployment in an economic downturn, such state behavior is eye-opening. And given that California is mired in red ink, it’s important for state government to conform to best-practices.
Why else have a state controller?
Washington. With the exception of one statewide elected official who is retiring, it’s also important to question the Washington State Legislature’s and bureaucrats’ elitist handling of taxpayer assets and disrespect of transparency standards. Just a few years ago, I devoted multiple columns about their shell game to furtively circumvent the state’s legal spending limit after incriminating e-mails were discovered. It resulted in a case before the Washington Supreme Court.
But nothing changed and the chicanery continues.
Four times voters approved taxpayers’ protections. But lawmakers keep circumventing the wishes of voters. Despite multi-billion dollar shortfalls, the spending keeps increasing; while the private sector has cut back significantly and has lost about 200,000 jobs in the past few years.
Washington has an outstanding state auditor who has repeatedly demonstrated the need for transparency and conducts performance audits. But not enough people in state government want transparency and good performance.
TV News
My sense is that a TV steady coverage of important issues would help put a stop to the government dysfunction.
For example, the average half hour of TV newscasts in Los Angeles has a whopping 22 seconds devoted to reports about local government, according to research by the USC Annenberg School for Communication and Journalism.
The study, reported by Variety, indicates the 22 seconds is comprised of “…budgets, law enforcement, education, new ordinances, voting procedures, city and government actions and more…”
Local business and the economy got a sum total of 29 seconds per half hour.
To what did the stations allocate their news coverage?
- Crime – two minutes, 50 seconds
- Sports and weather – 3 minutes, 36 seconds
- “Fluff” – two minutes, 26 seconds
- Promotional teases – two minutes, 10 seconds
“KCAL ran the most news about local government, economy and business,” Variety reported. “As for the L.A. Times, the paper devoted 10 percent of its front-page space to local government and 6 percent to L.A. business and economy.”
Any you know what? This is typical of most local TV coverage throughout California, Washington and the rest of the nation.
Not to be gauche, but generally the closest the stations come to reporting on the economy and the impacts of business events and trends are ostentatious consumer investigations – but little about business, the big economic picture or public policy. The rest of the time they’re either rewriting Associate Press stories or rushing out to do live shots of traffic accidents. It’s tragic.
When I was a full-time broadcast journalist in the 1970s and 1980s, I learned the public does care about the impacts of government behavior and business on the economy. When we covered a story about state government, it was remarkable to see the abrupt change in bureaucrats’ behavior and ratings improved.
When was the last time you saw a business journalist on your local TV newscast? Or, for that matter, when did you last see an editorial?
Newspapers do a much better job in both areas. But even print business-journalist jobs have been disappearing.
It’s time for reflection and change in the Fourth Estate. It’s a question of pride in doing the right thing for the community. Otherwise, many Americans will continue to feel their economic and political freedoms are at-risk.
From the Coach’s Corner, here are more public policy columns.
“Domestic policy can only defeat us; foreign policy can kill us.”
-John F. Kennedy
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
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.
New Threats to Economic Liberty: Cap-and-Trade, Spending Bills
Updated 11:30 a.m. PT Monday, Dec. 14, 2009
Businesses face new threats to their economic liberty and their ability to create jobs.
This is the result of two developments: The U.S. Senate passed a $1.1 trillion spending bill last Sunday; and it is now considering yet another cap-and-trade measure.
The massive spending bill, in funding federal agencies, exceeds the rate of inflation by more than 700 percent. Critics also contend it has $3.9 billion in pork spending. I’ll have more on that later.
The cap-and-trade measure was introduced by Sen. Maria Cantwell (D-WA).
Reasonable people agree going green is healthy for all stakeholders. Indeed, Sen. Cantwell’s cap-and-trade bill seems better for consumers than the current legislation being debated in Congress, but it still threatens businesses and their ability to create jobs.
In essence, her bill would fund rebates to consumers via emission credits by requiring manufacturers and other companies to buy credits in conjunction with government auctions. She contends an average household of four would receive $1,100 a year for 18 years from 2012 to 2030 – a total of $21,000.
The government auctions would keep the Wall Street investment banks out of the process.
Cap-and-trade is a controversial, complex subject and I’ve already voiced my opposition to the current House-passed bill (http://bit.ly/8E7Hs2). So I turned to a highly respected business spokesperson, Don Brunell, who is the president of AWB, the Association of Washington Business. AWB and he are known for moderate views on behalf of business. I managed to reach him while vacationing out-of-state with his family. He says he has not seen Sen. Cantwell’s bill, but he graciously responds.
“Generally, cap and trade proposals have created winners and losers which public policy and politicians should not do,” says Mr. Brunell. “That has been the experience in Europe, Australia and California where the government has passed and implemented cap and trade.”
He argues for a positive approach, incentives, to reducing greenhouse gases.
“For example, we brought a little home in Vancouver, WA, 1700 sq. ft., and replaced out water heater with a tankless heater which has dramatically cut our consumption of natural gas because we are only there on weekends. To offset the higher costs for the tankless system, we got a $1,500 federal tax credit,” he explains.
Mr. Brunell points out the progress already made by companies:
“Because of energy costs, many businesses and industries have dramatically cut consumption and thereby greenhouse gases.”
How serious is the problem of greenhouse gases in Washington state?
“Washington state produces less than .01 of 1 percent of the greenhouse gases but Gov. Gregoire wants us to sign on to the Western Climate Initiative along with California that would put us at a competitive disadvantage with Idaho which is not a cosigner of the Western Climate Initiative,” explains Mr. Brunell. “Apply that to a national level where the U.S. may be put at a competitive disadvantage with China, India and other countries which will ignore the Copenhagen agreements on climate change and greenhouse gas restrictions unilaterally by a government – such as the U.S. under either the Waxman-Markey bill passed last August by the House and proposals we’ve seen in the Senate.”
Spending Bill
The U.S. Senate’s massive $1 trillion-plus measure is a compilation of several spending bills and contains more than 1,000-plus pages. It dotes big money on such agencies as the Education Department, the State Department, the Department of Health and Human Services.
With a 10-percent increase, it spends far above the rate of inflation. Inflation was only 1.4 percent in August, according to Bloomberg on Dec. 8 (http://bit.ly/4ZzpNU).
Taxpayers for Common Cause, a watchdog organization, complained the bill has 5,224 pet-lawmaker projects costing $3.9 billion.
A published report indicates the pork includes a farmer’s market in Kentucky and rehabilitation of a theater in New York.
“You are spending money like a drunken sailor, and the bar is still open,” Sen. John McCain (R-AZ) was quoted to say in response to his colleagues regarding their earmarks.
Just so the U.S. Treasury can continue to borrow, also planned is raising the federal debt limit by $1.8 trillion to $14 trillion.
Ouch.
So, yes, in conclusion, my sense is that the cap-and-trade concept and heavy spending, which increases the national debt, constitute silent but ominous threats to the nation and business. They must have economic liberty if they are to succeed and create jobs.
From the Coach’s Corner, for Washington businesses, here’s the link to AWB: www.awb.org.
It contains a wealth of information. If you’re not a member, you might wish to consider joining. The folks at AWB know what they’re doing.
(Disclosure: I’ve worked with AWB on projects in the past.)
