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First, let's kill all the angels: Congress takes aim.
- SamAtt 16y agoWorst...written...article...EVER! This is the point (found 2 pages or 954 words down the article) "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." He also makes the point that registering with the SEC is expensive ($100,000+ in legal fees) and that he believes the "accredited investor" limits will be raised even further. The rest of the piece is just filler. (for anyone down voting this let me point out this article goes on for 9 printed pages and doesn't even explain who benefits from these clauses. That's just bad writing)
- vishaldpatel 16y agoSo umm.. who wins if these limits are successfully put in place?
- david927 16y agoSomething like this: http://www.me-vc.com http://www.me-vc.com
- SamAtt 16y agoI'm sure that company will too but on a larger scale I think Banks win. Angel Investors compete with small business loans and generally win since small business loans require you start paying them back right away where as angel investors just take a piece of the company. So if Angel investments become prohibitive it will force wannabe entrepreneurs into the waiting arms of the banks.
- jacquesm 16y agoAngel investors do not typically compete with small business loans because these companies would not in a million years get money from a bank. Angels invest exactly in those that can not get money from banks because they are too high risk. Once a business is established and has a balance sheet with some assets on it you can start thinking about applying for a regular loan. For small businesses at the 'start-up' level it would be great if they had access to bank loans for their needs, since borrowing from a bank is much cheaper long run than from an angel (after all, the bank does not take equity, only interest). Has anybody here ever gotten money from a bank based on a non-existent business?
- SamAtt 16y agoI'm sorry but you're just wrong here. This is the first link that comes up on Google when you search for "Small Business Loan": http://www.merchantloans.com/ http://www.merchantloans.com/. The first item listed under that heading is "Start/buy a business or franchise" This About.com article (http://sbinfocanada.about.com/cs/financing/a/getbusinessloan.htm http://sbinfocanada.about.com/cs/financing/a/getbusinessloan...) starts by saying... "Sooner or later most small businesses need to get a small business loan, whether to get the operating capital for business startup or to finance an expansion. " Small Business Loans are the #1 way that people start businesses in this country (no one Angel invests in a hot dog stand)
- jacquesm 16y agoYes, but hot dog stands are not the kind of things that we're talking about in this context. High tech, high risk start ups typically do not walk in to their bank managers office to get a few tens of thousands up to 100K loan to start their business, they're lucky enough to get an appointment in the first place. Banks like to borrow where there is collateral, a typical tech start up will invest in people and a little bit of hardware. Typically that hardware will be worth 0 if the company should fold. A hot dog stand can at least be sold to the next guy that wants to try his luck. Angels not investing in hot dog stands prove my point, they don't detract from it. Banks will gain if they get more business because of this, since angels do not invest in to that kind of business the banks already have it, and the kind of investment that angels do will not be touched by banks. Do you personally know of a high tech business that got its first capital from a bank ? Do you know of a high tech business that got its first capital from an angle or more than one angel investor ? For me the score is exactly 0 for the first and 20+ for the second. (where I know one or more of the founders personally)
- jbooth 16y agoYeah, I read a solid 2 pages of hyperbolic claims about how "devastating" this will be and how important angels are and how they're great and everything before I gave up on learning any actual facts and clicked back here. Thanks for the summary. How does the bill define "startups", for one? I'm perfectly capable of believing there will be regulations which have adverse unintended consequences on startups from this bill but that sounds extremely onerous -- is that for IPOs, only? I'd actually agree with that. If it's for raising seed money or anything up through a series C, I'd disagree, very strongly in the case of earlier rounds. The article doesn't tell us which it is, though.
- anamax 16y ago> is that for IPOs, only? IPOs were "hurt" by Sarbanes Oxley, the reaction to Enron. (No, there's nothing in it that would have affected Enron.) > If it's for raising seed money or anything up through a series C, I'd disagree, very strongly in the case of earlier rounds. The article doesn't tell us which it is, though. While that article may not have provided every piece of information that you'd like, Google is your friend. Above I quoted the relevant section AND provided a link.
- gojomo 16y agoWorst...written...article...EVER! Though you found this via a blog post, its origin is an opt-in weekly investors newsletter. That newsletter isn't written to make quick points to hurried drive-by readers following links from social news sites. Its primary audience is its regular readers, familiar with Mauldin's discursive style, slow build, and combination of multiple topics in one letter. He's providing a mind-meld, not a cliff's notes bullet list. It's good for his intended audience. I hate to see valuable things criticized in absolute global terms ("worst... EVER") when in fact the criticism is really relative and local ("bad for my purpose of the moment"). For all its benefits, the web makes this problem worse -- because it's so easy to link/excerpt/republish/retitle removing the original context.
- carbocation 16y agoI am naive on this issue, and I am going to assume good faith on the part of Congress for a moment. Presumably they are trying to protect someone - whom? It seems to me that angel investors were not the ones devastated by the subprime mortgage and banking crises. This appears to be a fix in search of a problem.
- gojomo 16y agoI want to know who, by name or agency, thinks raising the 'accredited investor' thresholds is a good or necessary step. Accredited investors aren't asking for this change. The participation of private investors (of any net worth) in regular equities was a non-factor in current financial troubles, or indeed any financial troubles of recent decades. If lessons from the recent crisis are what's motivating new net worth requirements on investments, how about new rules to block submillionaires from buying homes? That's be more rational as a reaction to the mortgage bubble than blocking millionaires from investing in companies! (I don't expect even lame-duck Dodd to tell average Americans they're too easily duped to own homes; we should be equally outraged he wants to tell millionaires they're too easily duped to make private equity investments.)
- SamAtt 16y agoAccredited investors aren't asking for this change. The participation of private investors (of any net worth) in regular equities was a non-factor in current financial troubles, or indeed any financial troubles of recent decades. Are you sure about that? Pre-IPO investment is a competition. There are hot startups and investors compete to invest in them. Beyond that everyone knows the early investors are the ones who make the most. If I'm someone with a net worth of several million dollars and I'm viciously competitive I'd probably like these new rules because it forces people to come to me rather than to their Aunt Sally who has $100,000 stuffed away in a savings account somewhere.
- gojomo 16y agoThat's a reasonable game-theoretic point -- and another reason why I'd like to know their names. I think the famous investors now rallying against these new rules can meet the new limits themselves, but know the industry as a whole will be hurt if they lose their $1-2.5mil net worth angel peers. So if there's some subset of angels who like this for non-positive-sum personal-advantage, let's out them. (There may be none; this could so thin the field of hopeful startups they lose far more in dealflow than they gain in lessened competition. But let's see.)
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- gyardley 16y agoLooks like whoever reposted John Mauldin's weekly newsletter chopped off the section that needs to be included to be allowed to repost it. Jerk move. Because John's newsletter is awesome - he's best when discussing the implications of skyrocketing sovereign debt - and because you might want to subscribe to it, here's what the article omitted: You have permission to publish this article electronically or in print as long as the following is included: John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore http://www.frontlinethoughts.com/learnmore
- barnaby 16y agoDuh, big banks would win. Think about it, if they remove competition from the private equity market, then they monopolize capital financing. This revision is nothing more than a monopoly bid.
- api 16y agoI wish more people got this. Regulations, especially complex and expensive ones, always favor large incumbents in a market over smaller or newer competitors. Expensive regulatory requirements are a regressive tax within the business world. The time and complexity is often as bad as the money. Time and complexity is something smaller ventures are incapable of dealing with, while larger ventures can easily just throw their big bureaucratic might at it. We seem to be rushing headlong toward a kind of Soviet economy in which huge mega-corporations aligned with the state run everything. (Actually, fascism is the proper term for this... but lumbering dinosaurs like the Telcos, GM, etc. are a little more Soviet in their drab outward appearance.)
- jordanb 16y agoHow many angel investors really have less than $2.3 million in assets? If I had to guess, I'd say that the increase in the cap was to try to cut down on Wall Street shysters ripping off doctors and marketing VPs. People with less than two million in assets are probably not full time investors, but rather are working-wealthy. They have day jobs and they don't have staff accountants or lawyers. But I could be wrong. Maybe this cap will have a negative impact on Angels. If so, the thing for Angel firms to do is contact your California senators, whose votes will be critical in the passage of the bill, and get an amendment
- anamax 16y ago> How many angel investors really have less than $2.3 million in assets? Wealth seems to follow a power law, so there are probably over 2x as many at $1M as there are at $2M. > If I had to guess, I'd say that the increase in the cap was to try to cut down on Wall Street shysters ripping off doctors and marketing VPs. How about some evidence that this is actually occurring? Heck - how about some evidence that "Wall Street shysters" are even trying to get money from angels? Note - Madoff was running a completely different racket, one well within the purview of the SEC, and they didn't catch on for decades. (He was supposedly stock picking.) > If so, the thing for Angel firms to do is contact your California senators, Angels don't have firms. Yes, there are some groups, but most angels aren't in them. Most folks affected this don't even know that it's something that they should be concerned about because they haven't done the angel thing yet. This means that they never will, and the folks who they would have funded likely won't get funded.
- anamax 16y ago> How many angel investors really have less than $2.3 million in assets? There are actually two criteria, assets (not including residences and some other things) and income. The current income threshold for single people is $200k/year. For married couples, it's $300k/year. Both are reasonably common among techsters in SV. Double those thresholds and potential angels are a lot less common.
- robak 16y agoDodd: a career politician who never had to live under the laws he created while being paid by lobbists to create them. How much more damage will be done before he finally leaves?
- blasdel 16y agoPlease stop repeating the same bullshit that seemingly every VC pundit is repeating about the Dodd bill. The "2.3m" figure is a total fabrication! The bill does not set new requirements at all. It just explicitly authorizes the SEC to adjust the income & net-worth requirements for inflation. The SEC was already empowered to alter the requirements independently of legislation (since they were not set by legislation), but they've never done so. The figures quoted are pulled out of their ass — they just took the old figures and adjusted for the last 30 years of inflation since they were set. Nothing in the bill says the SEC has to adjust it all at once or at all.
- gojomo 16y agoWhy would new "explicit authorization" be needed if using that power wasn't foreseen? These discriminatory thresholds shouldn't be raised one dollar -- they should be reduced, abolished, or replaced with something more respectful of individual circumstance (like a percentage-of-portfolio in private equity or waivers based on experience rather than pure wealth).
- anamax 16y ago> The bill does not set new requirements at all. It just explicitly authorizes the SEC to adjust the income & net-worth requirements for inflation. Oh really? Let's look at what the relevant section, 412, actually says. 19 SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STAND20 ARD FOR INFLATION. 21 The Commission shall, by rule— 22 (1) increase the financial threshold for an ac23 credited investor, as set forth in the rules of the 24 Commission under the Securities Act of 1933, by 25 calculating an amount that is greater than the [page break omitted] 1 amount in effect on the date of enactment of this 2 Act of $200,000 income for a natural person (or 3 $300,000 for a couple) and $1,000,000 in assets, as 4 the Commission determines is appropriate and in the 5 public interest, in light of price inflation since those 6 figures were determined; and 7 (2) adjust that threshold not less frequently 8 than once every 5 years, to reflect the percentage in 9 crease in the cost of living. http://banking.senate.gov/public/_files/AYO09D44_xml.pdf http://banking.senate.gov/public/_files/AYO09D44_xml.pdf If you're going to argue that "shall" doesn't mean that the SEC is being told to compute a number and apply it, please provide supporting evidence.
- Jdxdiego 16y agoWhile there is inherit risk involved in angel investing, it has been a fairly straightforward method for increasing one's wealth. It is becoming increasingly clear (to me at least) that this congress and administration are using regulation and governmental control to stifle and limit the production of wealth that cannot be taxed at a high rate. In most cases, an angel investment will be taxed as a capital gain, and usually one that is considered long term at a lower rate.