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Angel investors don’t usually stay up at night worrying about Capitol Hill. But a financial reform bill proposed by Chris Dodd, the Democrat chairing the Senate Banking Committee, includes new restrictions on startups and angels.
Not surprisingly, investors aren’t happy about it, saying it’s “insane,” “frankly ridiculous,” and aims to “destroy Silicon Valley.”
There are three changes that should have a particular effect on angel investors, a catch-all category which includes everyone from friends and family members who invest in a startup, to unaffiliated wealthy individuals, to side investments made by venture capitalists acting on their own.
First, Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.
Several investors have written pointed critiques of the bill:
- Fred Wilson of Union Square Ventures said startups will be “hit by shrapnel” from the bill.
- Robert E. Litan of the Kauffman Foundation, which researches entrepreneurship, wrote, “It is difficult to know why these provisions are in a much larger bill whose primary aim is to address the fundamental causes of the recent financial crisis.”
- Mike Masnick at tech policy site Techdirt described the restrictions as “somewhat horrifying.”
Investors offered more criticism on Twitter, with Slide vice president Keith Rabois tweeting, “Anyone still need more evidence that Obama and the Democrats intend to destroy Silicon Valley and the dreams of entrepreneurs?”
Rabois, an early PayPal employee and angel investor, has a strong libertarian/anti-regulatory political stance, but liberals hate these restrictions, too. Chris Sacca, an angel investor and former Googler who campaigned for Obama, also tweeted that people who “care about startups and making sure they have access to capital” need to sign a petition against the investing regulations.
I asked Sacca for more details about his opposition. In a voicemail, he said:
Obviously, I’m deeply concerned about Senator Dodd’s proposal to place these restrictions on angel investing. I think angel investing is undeniably one of the largest engines for job creation as well as innovation and competitiveness on the global scale for the United States. There’s no doubt about it that the restrictions that he’s proposing would absolutely chill investing.
Specifically, one of the things we need to take into account is while 10 years ago it may have taken years to build a company, companies are now built in a matter of weeks. So this 120-day waiting period is frankly ridiculous. I have companies with tens of thousands and hundreds of thousands of users that are built in a matter of weeks. They’re generating actual dollars of revenue, creating jobs, investing in real estate office space, capital equipment, etc. If they had to wait 120 days to actually apply for the ability to obtain financing it would absolutely just crush that market.
I think this is a very short-sighted proposal. It seems far afield from the problems that the banking committee is actually trying to address.
This outrage may not be futile, either. A source in the Senate Banking Committee told PEHub that the committee is talking the complaints seriously.
You can read a summary of the bill here.