7 ms·

Will the Last Startup Leaving Dodd's America Please Turn Off the Lights?

34 points by bigstartups 17y ago

hristov 17y ago
This is really silly. First of all, I would recommend that if there is a short blog post that does nothing more but summarise an article, one should submit the article and not the blog post. Second, the actual businessweek article is so silly it is laughable. It mentions that Dodd wants to connect the accredited investor metrics to inflation but admits that it does not know how that will happen. Then it makes a silly guess out of the blue how it may happen and and assumes that is how it will happen and then goes on to complain how it will be the end of the world. This is a classic straw man argument. Here's the thing - politicians do not like to make drastic changes unless they are warranted. I guarantee you Dodd is not going to double the income and net worth requirements for accredited investors overnight. The requirements will probably be connected to inflation starting now, which means they will keep their current values when the law passes and will slowly increase with inflation in the future.
- bballant 17y ago
  I'm with you. The article takes a tiny piece of the much larger financial reform regulation package which has been a bipartisan effort with Republican Richard Shelby very much involved, amplifies it through some hypothetical number crunching, and then attributes it all to Dodd. The blog post then takes it a step further by adding a layer of incendiary drama. Might cause one to forget the whole point of financial reform which is to prevent the sort of economic crisis we just went through from happening again--a crisis that has surely done more damage to startups than the proposed legislation could ever do.
- cjoh 17y ago
  What's frustrating is-- this is an opinion piece (the guy's a professor, not a writer), and this opinion piece has no NONE, zip nada, link to the actual bill that Dodd is proposing. It's all just conjecture. Drives me nuts that the media doesn't link to pieces of legislation when it's all online (and we at Sunlight work so hard to get it there).
- grellas 17y ago
  I would not be too sanguine about what politicians beholden to the trial lawyers might or might not do in this sort of area. When you shrink the pool of accredited investors, you remove many of the avenues by which startups can raise capital in a manner by which they can be assured they are not violating securities laws. If the safe avenues are no longer there, the risks of lawsuits increase dramatically. It will all be done in the name of protecting investor rights, but the real beneficiaries here will be the trial lawyers and the losers will indeed be all early-stage companies that seek to raise capital. Maybe it will happen quickly or maybe it will be gradual but the underlying motives here are pretty clear and have nothing to do with promoting the health of startups. I express no opinion about the quality of the article posted here but it is a mistake to assume this legislation is benign for startups. It is not.
  - hristov 17y ago
    Really? That is a bit far-fetched to say the least. And don't you think one should actually check out what the inflation adjustment is going to be before crying foul? If it is the version that I suggested is most likely, I don't think it will have much of an effect at all.
    - grellas 17y ago
      The bill gives the SEC an open ticket to make the form of inflation adjustment it deems reasonable. In other words, if the SEC uses the statutory grant of authority to take this in a direction of radically scaling back the numbers of investors who qualify as "accredited," there is nothing anybody can do about it. In effect, we are at the mercy of the regulators. This takes an area that has been defined by certainty and by a liberal view of what it takes to be "accredited" - no small benefit for the rise of startups over the past 30 years - and, in my view, gratuitously places a big question mark over it. You can take a sanguine view of what this means. I choose not to. Only time will tell which of us has the right instincts about it. For the benefit of the startups I represent, I sincerely hope that you are right and I am wrong.
      - hristov 17y ago
jbooth 17y ago
Money quote: <i>Currently, a person must have a net worth of $1 million or an annual income of $200,000 if single or $300,000 if married (and filing jointly) to be an accredited investor. The senator's proposed bill doesn't say what inflation adjustment will be used to convert these numbers, established in 1982, to today's dollars. But if we use the Bureau of Labor Statistics inflation calculator to adjust these figures on the basis of the consumer price index, then the annual income requirements for accredited investor status would become $449,000 if the investor were single and $674,000 if the investor were married, while the net worth requirement would become $2.25 million.</i> So, in other words, the bill's not even finished being drafted and they made some noise about maybe adjusting some figures, but they have CPMs to sell so they'll just assume "adjust" means "multiply by 2.25" and get the snappy headline. That said, Dodd clearly shouldn't do anything to hurt actual startup investment.
nfnaaron 17y ago
- What problem does Dodd say this is going to solve? Is he trying to reduce the workload of the SEC? - Whatever the problem is, is it a problem? - Does this solve it? - Who is paying/lobbying Dodd to do this? I imagine it wasn't on his radar until someone who stands to gain brought it to his attention. Is it just Tourette legislation? - If the result will be as bad as the article says ... how/why do we let Congress get away with fucking things up?
- anigbrowl 17y ago
  It would increase the workload of the SEC, though only very marginally. The SEC proposed (but then retracted) a very similar change about 3 years ago. You can read about it here: http://www.sec.gov/rules/proposed/2006/33-8766.pdf http://www.sec.gov/rules/proposed/2006/33-8766.pdf their rationale is set out on pages 17-18. tl;dr the SEC was worried that the explosion in house prices during the 90s (which raised many people's net worth above the accreditation threshold set in 1982) and the parallel increase in both the popularity and complexity of private investment offerings were tempting many people out of their financial depth. Large numbers of people borrowing against the value of their home to invest in hot deals without much understanding of the risks involved struck the SEC as a dangerous situation. Arguably, the events of the last few years proved them correct. The SEC was not trying to strangle startups (nor was it blind to the the possibility of such a result), but to maintain a barrier between overconfident homeowners and glib fund managers whose only business case was that markets tend to rise over time.
  - waterlesscloud 17y ago
    Good thing the highly trained professionals on wall street weren't out of their financial depth, eh?
    - anigbrowl 17y ago
      I think most of them are doing just fine. The problem is that too many of us paid for their swimming lessons :)
jsz0 17y ago
I don't know enough about the legislation to comment on it specifically but I do know politics -- it appears the Republicans are pulling another HCR strategy here and simply letting the Democrats go forward on this unchallenged on substance in an attempt to score a political Waterloo 2 (since the first one didn't quite work) Pretty sad state of affairs I think. I'm willing to accept Dodd's bill isn't great (or even good) but the response of trying to make it purely a political issue with dishonest speculation of repealing it later is pure lunacy from the opposition. People are desperate to see some major financial reform so it will be extremely popular no matter what's actually in the bill. The political narrative of saying "the people who caused the meltdown oppose the fix" is political gold. As a committed liberal I'm actually a bit worried that the classic check & balance of right/left is getting out of whack due to the massive failure of the Republican party to put governing over politics. They need to come to the table with honest intentions and substance and try to be part of the solution.
- anamax 17y ago
  > They need to come to the table with honest intentions and substance and try to be part of the solution. If Democrats left to their own devices do dumb things, why should we want to let them stay in power? What's wrong with holding Democrats responsible for their proposals?
  - anigbrowl 17y ago
    When elected members of a political party find themselves in opposition, they are not paid to just sit on their hands and say 'fuck it'. They still have an obligation to their constituents to participate in the legislative process even if they don't expect to succeed. That's why we have a legislative branch instead of just an executive.
    - anamax 17y ago
      > When elected members of a political party find themselves in opposition, they are not paid to just sit on their hands and say 'fuck it'. Remind me - did you complain when Dems did that to Bush? (Pre 2006)? You remember - "Disent is patriotic" and all that. Or is that somehow different? Of cours, the Repubs actually do have proposals. You don't hear about them in the "tingly leg" media, so you'd have you'd have to look elsewhere. Or is that their fault too?
jackowayed 17y ago
Why do investors need to be accredited at all? If I, someone with savings and income far below those thresholds, want to invest a large portion of my net worth into a startup I really believe in, why should the government stop me? It's so risky that it's a horrible idea, but don't I have a right to be stupid?
- hristov 17y ago
  Because of scams. Of course you are going to say that you should have the right to fall for scams if you want to, but some scams become so prevalent they actually have an effect on the economy, or can crash the stockmarket. I also have to say that the accredited investor rules do not exactly prohibit you from investing in startups. Or from owning stock. They are part of a complex securities regulation framework and it is difficult to explain in a quick message board post exactly where they fit in.
  - gojomo 17y ago
    But the result of the rule is that submillionaires can't invest in YC-like companies, but they can still lose all their money (and whatever additional amount banks will loan them) on... - day-trading - real-estate-speculation - investing in 'safe' public stocks like Enron, Fannie Mae, Lehman, and GM - trading forex following rules they learned from late-night-informercials - gambling in licensed casinos offering rigged games - buying state lottery tickets All these often-negative-expectation activities are allowed. So what, exactly, do the 'accredited investor' limits prevent a gullible person from doing? A fool will be parted from his money; these rules just change the form of the transactions that will be used. Meanwhile, the limits prevent wise-but-poor people from being shareholders in small businesses that they actually have some expertise about, and which are more likely to be positive-expectation than the above activities.
    - hristov 17y ago
      The laws obviously cannot prevent all fraud. But the least they can do is make fraud relatively difficult. Some of the examples you provided were fraud, but they were relatively difficult to pull off, as opposed to what would happen if there were no securities laws. (Some of your examples, were not fraud but just stupid decisions.) For example Enron had to work hard to fool all those accountants, and as a result one of the largest accounting companies in the world went under and many of its partners are still mired in lawsuits. The banks created a very convoluted system to mislead investors as to the value of their securities, which involved a lot of new legislation, somehow tricking or corrupting the ratings agencies, controlling markets, etc. So scams happen, but they are not as easy. Of course I think securities laws could stand improvement. But we do not have the case where there are so many scams on the stock market that everybody assumes that everything is a scam and nobody invests, so the stock market is essentially useless. This is the case for many (actually most) countries.
gills 17y ago
Step 1. Make private investment difficult and costly. Step 2. Save the day with gov small business investment. 3. Pick winners based on political agenda. There's more than one way to build a command economy...

34 points by bigstartups 17y ago

This is really silly. First of all, I would recommend that if there is a short blog post that does nothing more but summarise an article, one should submit the article and not the blog post. Second, the actual businessweek article is so silly it is laughable. It mentions that Dodd wants to connect the accredited investor metrics to inflation but admits that it does not know how that will happen. Then it makes a silly guess out of the blue how it may happen and and assumes that is how it will happen and then goes on to complain how it will be the end of the world. This is a classic straw man argument. Here's the thing - politicians do not like to make drastic changes unless they are warranted. I guarantee you Dodd is not going to double the income and net worth requirements for accredited investors overnight. The requirements will probably be connected to inflation starting now, which means they will keep their current values when the law passes and will slowly increase with inflation in the future.

bballant 17y ago
I'm with you. The article takes a tiny piece of the much larger financial reform regulation package which has been a bipartisan effort with Republican Richard Shelby very much involved, amplifies it through some hypothetical number crunching, and then attributes it all to Dodd. The blog post then takes it a step further by adding a layer of incendiary drama. Might cause one to forget the whole point of financial reform which is to prevent the sort of economic crisis we just went through from happening again--a crisis that has surely done more damage to startups than the proposed legislation could ever do.
cjoh 17y ago
What's frustrating is-- this is an opinion piece (the guy's a professor, not a writer), and this opinion piece has no NONE, zip nada, link to the actual bill that Dodd is proposing. It's all just conjecture. Drives me nuts that the media doesn't link to pieces of legislation when it's all online (and we at Sunlight work so hard to get it there).
grellas 17y ago
I would not be too sanguine about what politicians beholden to the trial lawyers might or might not do in this sort of area. When you shrink the pool of accredited investors, you remove many of the avenues by which startups can raise capital in a manner by which they can be assured they are not violating securities laws. If the safe avenues are no longer there, the risks of lawsuits increase dramatically. It will all be done in the name of protecting investor rights, but the real beneficiaries here will be the trial lawyers and the losers will indeed be all early-stage companies that seek to raise capital. Maybe it will happen quickly or maybe it will be gradual but the underlying motives here are pretty clear and have nothing to do with promoting the health of startups. I express no opinion about the quality of the article posted here but it is a mistake to assume this legislation is benign for startups. It is not.
- hristov 17y ago
  Really? That is a bit far-fetched to say the least. And don't you think one should actually check out what the inflation adjustment is going to be before crying foul? If it is the version that I suggested is most likely, I don't think it will have much of an effect at all.
  - grellas 17y ago
    The bill gives the SEC an open ticket to make the form of inflation adjustment it deems reasonable. In other words, if the SEC uses the statutory grant of authority to take this in a direction of radically scaling back the numbers of investors who qualify as "accredited," there is nothing anybody can do about it. In effect, we are at the mercy of the regulators. This takes an area that has been defined by certainty and by a liberal view of what it takes to be "accredited" - no small benefit for the rise of startups over the past 30 years - and, in my view, gratuitously places a big question mark over it. You can take a sanguine view of what this means. I choose not to. Only time will tell which of us has the right instincts about it. For the benefit of the startups I represent, I sincerely hope that you are right and I am wrong.
    - hristov 17y ago

jbooth 17y ago

Money quote: <i>Currently, a person must have a net worth of $1 million or an annual income of $200,000 if single or $300,000 if married (and filing jointly) to be an accredited investor. The senator's proposed bill doesn't say what inflation adjustment will be used to convert these numbers, established in 1982, to today's dollars. But if we use the Bureau of Labor Statistics inflation calculator to adjust these figures on the basis of the consumer price index, then the annual income requirements for accredited investor status would become $449,000 if the investor were single and $674,000 if the investor were married, while the net worth requirement would become $2.25 million.</i> So, in other words, the bill's not even finished being drafted and they made some noise about maybe adjusting some figures, but they have CPMs to sell so they'll just assume "adjust" means "multiply by 2.25" and get the snappy headline. That said, Dodd clearly shouldn't do anything to hurt actual startup investment.

nfnaaron 17y ago

- What problem does Dodd say this is going to solve? Is he trying to reduce the workload of the SEC? - Whatever the problem is, is it a problem? - Does this solve it? - Who is paying/lobbying Dodd to do this? I imagine it wasn't on his radar until someone who stands to gain brought it to his attention. Is it just Tourette legislation? - If the result will be as bad as the article says ... how/why do we let Congress get away with fucking things up?

anigbrowl 17y ago
It would increase the workload of the SEC, though only very marginally. The SEC proposed (but then retracted) a very similar change about 3 years ago. You can read about it here: http://www.sec.gov/rules/proposed/2006/33-8766.pdf http://www.sec.gov/rules/proposed/2006/33-8766.pdf their rationale is set out on pages 17-18. tl;dr the SEC was worried that the explosion in house prices during the 90s (which raised many people's net worth above the accreditation threshold set in 1982) and the parallel increase in both the popularity and complexity of private investment offerings were tempting many people out of their financial depth. Large numbers of people borrowing against the value of their home to invest in hot deals without much understanding of the risks involved struck the SEC as a dangerous situation. Arguably, the events of the last few years proved them correct. The SEC was not trying to strangle startups (nor was it blind to the the possibility of such a result), but to maintain a barrier between overconfident homeowners and glib fund managers whose only business case was that markets tend to rise over time.
- waterlesscloud 17y ago
  Good thing the highly trained professionals on wall street weren't out of their financial depth, eh?
  - anigbrowl 17y ago
    I think most of them are doing just fine. The problem is that too many of us paid for their swimming lessons :)

jsz0 17y ago

I don't know enough about the legislation to comment on it specifically but I do know politics -- it appears the Republicans are pulling another HCR strategy here and simply letting the Democrats go forward on this unchallenged on substance in an attempt to score a political Waterloo 2 (since the first one didn't quite work) Pretty sad state of affairs I think. I'm willing to accept Dodd's bill isn't great (or even good) but the response of trying to make it purely a political issue with dishonest speculation of repealing it later is pure lunacy from the opposition. People are desperate to see some major financial reform so it will be extremely popular no matter what's actually in the bill. The political narrative of saying "the people who caused the meltdown oppose the fix" is political gold. As a committed liberal I'm actually a bit worried that the classic check & balance of right/left is getting out of whack due to the massive failure of the Republican party to put governing over politics. They need to come to the table with honest intentions and substance and try to be part of the solution.

anamax 17y ago
> They need to come to the table with honest intentions and substance and try to be part of the solution. If Democrats left to their own devices do dumb things, why should we want to let them stay in power? What's wrong with holding Democrats responsible for their proposals?
- anigbrowl 17y ago
  When elected members of a political party find themselves in opposition, they are not paid to just sit on their hands and say 'fuck it'. They still have an obligation to their constituents to participate in the legislative process even if they don't expect to succeed. That's why we have a legislative branch instead of just an executive.
  - anamax 17y ago
    > When elected members of a political party find themselves in opposition, they are not paid to just sit on their hands and say 'fuck it'. Remind me - did you complain when Dems did that to Bush? (Pre 2006)? You remember - "Disent is patriotic" and all that. Or is that somehow different? Of cours, the Repubs actually do have proposals. You don't hear about them in the "tingly leg" media, so you'd have you'd have to look elsewhere. Or is that their fault too?

jackowayed 17y ago

Why do investors need to be accredited at all? If I, someone with savings and income far below those thresholds, want to invest a large portion of my net worth into a startup I really believe in, why should the government stop me? It's so risky that it's a horrible idea, but don't I have a right to be stupid?

hristov 17y ago
Because of scams. Of course you are going to say that you should have the right to fall for scams if you want to, but some scams become so prevalent they actually have an effect on the economy, or can crash the stockmarket. I also have to say that the accredited investor rules do not exactly prohibit you from investing in startups. Or from owning stock. They are part of a complex securities regulation framework and it is difficult to explain in a quick message board post exactly where they fit in.
- gojomo 17y ago
  But the result of the rule is that submillionaires can't invest in YC-like companies, but they can still lose all their money (and whatever additional amount banks will loan them) on... - day-trading - real-estate-speculation - investing in 'safe' public stocks like Enron, Fannie Mae, Lehman, and GM - trading forex following rules they learned from late-night-informercials - gambling in licensed casinos offering rigged games - buying state lottery tickets All these often-negative-expectation activities are allowed. So what, exactly, do the 'accredited investor' limits prevent a gullible person from doing? A fool will be parted from his money; these rules just change the form of the transactions that will be used. Meanwhile, the limits prevent wise-but-poor people from being shareholders in small businesses that they actually have some expertise about, and which are more likely to be positive-expectation than the above activities.
  - hristov 17y ago
    The laws obviously cannot prevent all fraud. But the least they can do is make fraud relatively difficult. Some of the examples you provided were fraud, but they were relatively difficult to pull off, as opposed to what would happen if there were no securities laws. (Some of your examples, were not fraud but just stupid decisions.) For example Enron had to work hard to fool all those accountants, and as a result one of the largest accounting companies in the world went under and many of its partners are still mired in lawsuits. The banks created a very convoluted system to mislead investors as to the value of their securities, which involved a lot of new legislation, somehow tricking or corrupting the ratings agencies, controlling markets, etc. So scams happen, but they are not as easy. Of course I think securities laws could stand improvement. But we do not have the case where there are so many scams on the stock market that everybody assumes that everything is a scam and nobody invests, so the stock market is essentially useless. This is the case for many (actually most) countries.

gills 17y ago

Step 1. Make private investment difficult and costly. Step 2. Save the day with gov small business investment. 3. Pick winners based on political agenda. There's more than one way to build a command economy...