Why Does Financial Reform Punish Startup Companies And Angel Investors?

from the not-good-at-all dept

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