Why Does Financial Reform Punish Startup Companies And Angel Investors?

from the not-good-at-all dept

Thu, Mar 25th 2010 3:08pm — Mike Masnick

It's amazing how badly politicians who know a little bit can screw things up. Apparently, Chris Dodd's financial reform bill contains a somewhat horrifying clause that would seriously harm the ability of startups to raise angel financing. Startups raising angel money are about as far from what caused the financial crisis as anything I can think of, and yet, the financial reform bill contains some ridiculous provisions:

Under existing law, startup companies can raise money easily and quickly from "accredited investors" -- individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be "accredited."

As someone who has raised a fair bit of money from accredited angels in the past, this proposal would be quite troubling. The idea that a company would need to wait four months before it can get the money it needs would kill a lot of startups. There is no evidence that the angel funding process has been problematic in any way. In fact, some might argue that it's one part of the financial system that works incredibly well. So why are politicians mucking with it?

Filed Under: angel investors, chris dodd, financial reform, investing, sec

27 Comments

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:Lobo Santo (profile), 25 Mar 2010 @ 3:26pm

*sigh* Ultama Ratio Regum...
The final result of capitalism is monopoly. Despite having laws against forming a monopoly, the market urges of capitalism will drive it to this final end-point--regardless of the means required to make it so (lobbyists and lawyers in some parts of the world; thugs and guns in other parts of the world).
What we see here is simply the end-game of capitalism at work. The answer? Push the reset button, time to start a new game.
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Anonymous Coward, 25 Mar 2010 @ 3:31pm

Have you forgotten the dot-com bubble already?
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anymouse (profile), 25 Mar 2010 @ 3:41pm

Politicians Jealous?
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Mike Masnick (profile), 25 Mar 2010 @ 3:43pm

Re:
Have you forgotten the dot-com bubble already?

Which had nothing whatsoever to do with angel investors. But, why let details get in the way?
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Anonymous Coward, 25 Mar 2010 @ 4:06pm

You mean the same kind of startups and VCs that like patents? Are you sure you support them?
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Anonymous Coward, 25 Mar 2010 @ 4:45pm

Re:
your confused, VCs don't like patents. No one starting a business likes patents. In fact the only ones that do are lawyers, useless has beens that cant make a business out of an idea, mega corporations who use them to lock their respective markets and "invention assistant" scamers... VC's are in the business of DOING stuff.. anyone that dares to actually do stuff is exposed to needles risk.
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Anonymous Coward, 25 Mar 2010 @ 5:00pm

Re: Re:
Actually, I'm not confused. I currently work for a startup and I have worked for other startups in the past - they all like patents. In fact in at least one case it was the investors that asked us to patent as much as we could. In my experience, startups like patents for two reasons:
1. As a defensive move to help protect themselves from others in the same space that also have patents.
2. To add value to the company. At aquisition time patents are one more thing to negociate over.

As a startup with VC investors we DO plenty, we are DOING stuff but we still have patents.
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kid mercury (profile), 25 Mar 2010 @ 5:24pm

can't say i feel sorry for the investors. when it comes time to federal reserve reform, or stopping corrupt wars, or doing any kind of serious political activism, they refuse -- after all, "it's not their job" or "it's bad for business." turns out being an ignorant and irresponsible citizen is bad for business too. who would've thought.

it's very simple: government is massively broken. this is a big problem. all solutions start with the truth. ergo.... http://www.patriotsquestion911.com

don't want to respect the truth? want to ostracize those who do? fine. have fun paying the price. when the "angels" are mature enough to take responsibility for their government, maybe they'll get their free market back. until then, they get what they deserve.
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Mike Masnick (profile), 25 Mar 2010 @ 5:58pm

Re:
You mean the same kind of startups and VCs that like patents? Are you sure you support them?

Huh? First we're talking about angel investments, not VCs, and of course I support startups. But I think you're very wrong. Most early stage investors are very much worried about patents.

http://www.techdirt.com/articles/20100111/2233347712.shtml

There are some rather bad investors who focus too much on patents, because they don't know much about how business actually works -- but as we've highlighted most of the best early stage investors are quite worried about patents.

But, either way, that has nothing, whatsoever, to do with this particular discussion. We're just talking about the logistics of funding startups.
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Anonymous Coward, 25 Mar 2010 @ 6:18pm

Re:
What in God's name are you blabbering on about? Seriously...what the fuck are you talking about? Do you mind if the rest of us attempt to engage in mutually beneficial business without the government fucking us over and you spewing nonsense out your piehole?
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Derek Kerton (profile), 25 Mar 2010 @ 6:32pm

Re: Re: Re:
You need to note the difference between:

1) In the current Intellectual Property environment, startups will seek patents to bolster their valuation, and to protect against attack. (Both of which you mention)

and

2) Startups like patents.

As a company that is hoping to DO stuff, and wow the world, it would be better to just do so unencumbered by the threat of lawsuit from others, without having to try to work around other people's patents, and without having to spend your own resources getting patents instead of building product.

This isn't absolute. For some startups, steeped in true R&D over years, there is a stronger argument in favor or patents.
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Anonymous Coward, 25 Mar 2010 @ 6:34pm

Re: Re:
"First we're talking about angel investments, not VCs ... We're just talking about the logistics of funding startups."

Fair enough, I suppose I meant investors not VCs. You are right, having the government make it harder to get started is a bad idea. This particular rule will do more harm than good.

My experience with startups and patents seems to differ from what you think. I agree that focusing too much on patents is not good. Patents or no patents, to be successful you have to execute. If you happen to get a couple of patents along the way while you execute it sure does not hurt.
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Derek Kerton (profile), 25 Mar 2010 @ 6:34pm

Re: Re:
Looks like comment spam, in order to plug some fringe website.
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Anonymous Coward, 25 Mar 2010 @ 6:45pm

Re: Re: Re: Re:
I'm working from experience here, the places I have worked like patents. I currently work in the medical device space, we do a fair amount R&D. There are at least 3 multi-national, giant, companies with which we compete. We had to do things differently because of existing IP and let me tell you, one of the existing methods is obvious and a nice way to do things but its locked up. I get it.
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Anonymous Coward, 25 Mar 2010 @ 8:10pm

I've never heard an 'accredited investor' bitch because they were swindled out of money. These people are wealthy because they weren't stupid to begin with, and they make decisions carefully.

A friend of mine asked her brother 'You didn't do any business with Madoff, did you?' because they know quite a few people who lost fortunes through that scheming bastard. He told her 'Do I look like I'm stupid?' It didn't matter that he was one of Bernie Madoff's ideal targets because he never took the bait. He wasn't impressed with the sales pitch he heard from friends, colleagues, religious associates and family members who had drunk the Bernie and Ruthie Kool-Aid.

So I really think we should leave these people alone and don't start tampering with the minimum net worth required to be classified as an accredited investor (last time I checked, it was $200k in income per year or a million dollars net worth.)
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Chargone (profile), 25 Mar 2010 @ 8:27pm

Re: *sigh* Ultama Ratio Regum...
or, you know, stop freaking out about communism and obsessing about free trade and just live with the fact that 'moral capitalism', which is basically capitalism where the government exists to hit the corps in the face when they get out of line rather than do their bidding, is actually a heck of a lot more viable...

also helps if you're willing to make use of protectionist measures to shape the resource flow within, into, and out of your country, rather than purely to make sure the individuals currently making money make more.

but the key to th whole thing is:the government's purpose in a functional capitalist system is to provide the outside limits to what is viable within it, Not to be a tool for those playing the game.

if capitalism is a game, government should be the Rules, not a card.

'course, that's more of a cultural thing than anything...
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Anonymous Coward, 25 Mar 2010 @ 9:16pm

"So why are politicians mucking with it? "

because politicians do what they do best, take something good and destroy it. Whenever a politician sees something good it must destroy it.

If it moves, tax it. If it keeps moving, regulate it. If it doesn't move, subsidize it.
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Anonymous Coward, 25 Mar 2010 @ 9:20pm

Re: Re: Re: Re: Re:
Again, as the previous person said, wanting to get patents for defensive measures is different than liking patents in general.
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Anonymous Coward, 25 Mar 2010 @ 9:23pm

The government exists for one sole purpose, to maintain the status quo. Nothing else matters.
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pwb (profile), 25 Mar 2010 @ 11:32pm

Does anyone really know what the true impact of this is going to be? A lot of the speculation seems to be pretty far off base.
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Anonymous Coward, 26 Mar 2010 @ 9:41pm

Re:
Do you know the true impact? If not, then that's just another criticism against it.

and I don't think any of it is far off base. It's all based on reason and logic.
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Anonymous Coward, 26 Mar 2010 @ 9:43pm

(to continue) Not to mention the fact that many startup companies have benefited from the current laws exactly because they exercise the freedoms that the current laws allow, freedoms that reform will take away. So it is reasonable to deduce that these benefits will also likely be taken away if the freedoms that provide said benefits get taken away. Fair enough?
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Anonymous Coward, 26 Mar 2010 @ 9:43pm

Re:
Errr.... that was meant to be in response to the past that said

"Does anyone really know what the true impact of this is going to be? A lot of the speculation seems to be pretty far off base."
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Anonymous Coward, 26 Mar 2010 @ 9:44pm

Re: Re:
the POST that said *
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Katherine Chalmers, 15 Apr 2010 @ 7:18pm

Re:
The new regulation would more than double the income and net worth requirements to $499K income or $2.3 million in net worth. Businessweek estimates this would basically slash the number of eligible accredited investors by about 77%.
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Mark Buffington, 24 Apr 2010 @ 7:04am

Financial "Reform" a farce for Angels
Exactly. The current system of capital formation for small companies works extremely well. Rarely is there fraud in this asset class, and when there is it is relatively small. In stark contrast to the big investment bank/broker-dealer scams of the past 50 years (e.g. unregulated credit default swaps, securized garbage that trades under the name commerical mortgage-backed securities, etc.) angel investing provides tons of positive benefits for society, most notably, new jobs. The fact that regulators are pushing industry-killing changes in this space prove two things: 1) they have no idea how to address the real problems that plague the financial industry, and 2) there is a great need in our country to improve the quality and knowledge of regulators. The goal is to create the most sophisticated, and easily-accessible financial system in the world while, at the same time, weeding out the elements of the industry that seek to defraud investors. The bill as currently proposed does nothing of the sort.
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Mikle, 12 Sep 2019 @ 1:00am

Such bills always put a spoke in the wheels of small businesses or startups. You're right, waiting 4 months can kill a lot of undertakings. I recently read an article https://enterph.com/blog/get-special-investors-resident-visa-sirv-step-step-guide/ and I understand that now many of the investment program is beneficial to start abroad, where there are no such problems and difficulties with the law. And the design itself is very fast
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