Friday, March 26, 2010

"Startups Get Hit By Shrapnel In The Banking Bill"

A few years ago I was pitching one of Merrill's biggest producers (his assets under management didn't go under 10-figures during the recent unpleasantness) some wild-ass angel investment for his personal account. It was about fifteen minutes after the close on a Friday when one of his assistants (registered principal, CPA, stunningly attractive) said one of the team's clients, Mr. ____ was on the phone.

He took the call, spoke for less than a minute and turned back to me:
"Geez, just because the man has $3 million with us he thinks we should shoot the breeze".
Not being shy I commented "He's accredited".
The Big Broker started laughing and said "Everyone's accredited".

Then he went back to telling me how he survived the '73-'74 bear market and the lessons he learned.

From A VC:

There is a big banking reform bill working its way through the Senate right now. It is sponsored by Chris Dodd, Chairman of the Senate Banking Committee. It has a long name I can't remember, so I'll call it the Dodd Banking Bill.

What does a bill attempting to regulate the banking industry have to do with startups? Well unfortunately, it contains two provisions that are quite problematic and hurtful to entrepreneurs and startups. They are:

1) Changing the definition of a "qualified investor" in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd's bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.

2) Eliminate the existing federal pre-emption over state regulation of "accredited offerings." Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.

I have no idea why either of these provisions ended up in a bill designed to regulate the banking industry. Entrepreneurs and startups don't use banks to finance them. They get their initial capital from angel investors and then VCs as they grow. This system works well, did not blow up in 2008, and is not in need of reform of the type Dodd wants to throw at us.

In fact, what we need is to eliminate all accredited investor requirements for small investments of up to $25k. Why does someone have to be a millionaire to invest in a friend's startup? I understand that we don't want someone mortgaging their home, or betting their entire life's savings on a startup. But for a small amount, like $25k, we should not be regulating angel investing....MORE

It's not as if there's no wiggle room. Under both Rule's 505 and 506 you can have up to 35 non-Accrediteds although it can be a pain and under 506 (over $5mil.) the Federales introduce another category: 'sophisticated'.

Personally I'd be cool with repealing both the '33 and '34 Acts.

As the SEC's first Commissioner, Joe Kennedy, said when he was he was still on Wall Street:

"It's easy to make money in this market," said Kennedy, famously, to an associate. "We'd better get in before they pass a law against it."