(Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs. He submitted this column to VentureBeat.)
A reader asks: I saw your story in March about how Senator Dodd’s financial reform bill could destroy angel investing. I see now that the bill has passed, with certain amendments made in the U.S. Senate that watered down some of the provisions. What’s the story with this issue? Will the bill still hurt angel investing?
Answer: There’s good news and bad news.
The good news is that the financial reform bill recently passed by Congress omitted the most troubling provision in Sen. Dodd’s original proposal, which essentially required a filing with the SEC in connection with any seed or angel financing (even if all the investors were “accredited investors”) and potentially gave state securities commission(s) the right to review the merits of the financing
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As I discussed in the story you cite, this would have created significant delay and cost in connection with seed and angel financings and also would have put the State securities commissions back in the private placement game – which is exactly what SEC Rule 506 is designed to prevent
So, the fact that this provision will not become law is very good news indeed
The other piece of good news is that under Dodd’s original proposal the definition of “accredited investor” would have been revised to require individuals to have either a net worth of at least $2.3 million (up from $1 million) or annual income in each of the two most recent years (and a reasonable expectation of such income level in the current year) of $449,000 individually or $674,000 jointly (up from $200,000 and $300,000, respectively). According to Business Week, this revision would have lowered the number of individual accredited investors by 77 percent
The bill, passed by Congress on July 15, leaves the net worth test at $1 million (subject to the change discussed below) and leaves the annual-income test at $200,000 individually and $300,000 jointly. Again: Good news.
The bad news is that the net-worth test no longer includes the value of the investor’s principal residence. Clearly, this is a big change – and it could significantly lower the pool of accredited investors.
The other piece of bad news is that the bill expressly permits the SEC to conduct an immediate review and modification of the annual-income test if “deem[ed] appropriate for the protection of investors. . . .” In other words, the annual-income test may go up – but we’ll have to wait and see.
Finally, the bill also requires the SEC in four years (and once every four years thereafter) to review the “accredited investor” definition “in its entirety” and make appropriate changes – though the bill is poorly drafted and this four-year review may not apply to the “accredited investor” definition for purposes of private placements under Regulation D (the typical private placement).
Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.
Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.