6 ms·

Tell HN: Senator Dodd Has Mostly Listened Concerning Regulation D

57 points by grellas 16y ago

Recent (sometimes spirited) threads on HN have highlighted the potential risks to angel investing from provisions in the Senate Banking Bill that would have (at least as interpreted in a worst case by the Angel Capital Association): (1) altered the definition of "accredited investor" by increasing the thresholds for an individual from $1 million in net worth or $200K in annual income to about $2.3 million in net worth (excluding value of principal residence) or $450K in annual income; and (2) subjected many Regulation D to filings to SEC review during a mandated 120-day wait period and also opened up such filings to all sorts of new state regulation by removing federal preemption in this area of private placements. These provisions posed a potentially serious risk to startup funding. ACA, for example, estimated that the "accredited investor" changes would cut the number of qualified angel investors by an estimated 77%. Many in the startup community wrote to Senator Dodd and others strongly urging them to fix these provisions. It appears that Senator Dodd has mostly listened. Last week, he joined with Republican Senator Kit Bond to offer a bipartisan amendment to the banking bill that represented a significant compromise on the Regulation D issues. The Bond/Dodd amendment does the following: (1) leaves the definition of "accredited investor" basically unchanged until at least 2014, though the $1 million net worth threshold must now be calculated without including the value of an investor's principal residence; and (2) deletes the 120-wait period and blocks increased state meddling with Regulation D offerings. This news is HUGE for startups. The result is not perfect but, compared to what might have been, this is a significant reprieve for Regulation D that will allow funding deals in the startup world to continue largely unabated and that defeats the deal-killing rules that otherwise might have passed in this bill. I had been looking for a simple reference point on the web where this had been cleanly reported but was unable to find it - hence this post. At this point, the Senate version of the banking bill is as noted above while the House version makes no changes whatever to Regulation D. The good news, then, is that this bill should pass either in the form summarized above or with no changes at all to Regulation D should the above Senate provisions be dropped altogether in conference. I will link to some of the partial reports of this in a comment.

grellas 16y ago
Here are some relevant links about this across the web touching on the effects of the Bond/Dodd amendments: http://www.angelcapitalassociation.org/resources/public-policy/federal-policy-issues/highlights/ http://www.angelcapitalassociation.org/resources/public-poli... (statement by Angel Capital Association with links to primary sources) http://dodd.senate.gov/?q=node/5629 http://dodd.senate.gov/?q=node/5629 (statement from Senator Dodd's website) http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/RegulationDReform/tabid/546/Default.aspx http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/... (with links to primary sources) http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-using-the-secs-logo-1.html http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-u... (with discussion of certain remaining problems with the amendment language) http://online.wsj.com/article/SB10001424052748703957904575252430233003388.html?mod=WSJ_Opinion_AboveLEFTTop http://online.wsj.com/article/SB1000142405274870395790457525... (WSJ editorial entitled "Angels (Back) in America" - behind paywall) http://martendale.com/government/article_Adams-Reese-LLP_1011518.htm http://martendale.com/government/article_Adams-Reese-LLP_101... (excellent technical discussion on where this stood a short while ago just as the amendments were being introduced) http://www.pehub.com/71242/up-the-bracket-dodds-discriminatory-deal/ http://www.pehub.com/71242/up-the-bracket-dodds-discriminato... (a strongly expressed negative view of the compromise, arguing that excluding value of principal residence is harmful and emphasizing that the accredited investor rules should be liberalized so that more and more people can invest - strongest point: the same people who block small investors from investing in startups also strongly push state lottery systems that do far more harm to small "investors" than startup investing would ever do)
- gte910h 16y ago
  I find the comparison of a state lottery, which is something completely not personally sold, to investment in a business, pressured by friends, family, or by random salespeople, to be in such different categories, the comparison is disingenuous. Additionally, the lotteries require an infinitesimal expenditure compared to startup funding. While I agree with the pehub poster that the portion about housing and mortgages is off, I would suggest that liquid assets - all liabilities be used as a gauge of net worth, then lower the floor to something more like 700k.
  - jswinghammer 16y ago
    Clearly you've never lived in a major city or around poorer people. I've seen people drop the kind of money that would make me cringe to spend on lottery tickets every week for the last 10 years that I've lived in Boston. It's a joke to suggest that people are pressuring family to invest in their companies in the same way that the lottery pushes itself on those least able to afford it. The lottery is a lot more effective at preying on its victims than any salesmen that I've ever met. The lottery is a tax on the poor dressed up to look good by politicians who seek to gain from it. A single lottery ticket is nothing but the people I see never just buy one. They buy a lot of them.
    - enjo 16y ago
      It does happen. I've met more than one family where an elderly mother and/or father where forced back into working because they invested in their entire life-savings into their child's (or nephew's, niece's, etc...) hair-brained get-rich-quick scheme. That said, I don't see how it's governments role to make sure people don't screw themselves over. Bring on casinos, lotteries, and open investement as far as I'm concerned.
      - jswinghammer 16y ago
        I agree with the exception of the lottery. I'd rather not have the state involved in this. I just don't like my tax money funding (even if the lottery more than pays for itself) something I consider immoral.
jswinghammer 16y ago
I've never really understood the reasons for limiting investors in companies to those who are already rich. The current crisis was in no way caused by anyone investing in startups or small businesses. The crisis was caused by too much credit flowing into all the wrong hands due to the incentives that existed for that to happen. The crisis of 1929 had the same cause. The problem is inflation plain and simple. The animal spirits that Keynesians are invoking now were not the cause of the housing bust-the fundamentals just were not there. They weren't ever there. Inflation hid that fact for years from many people. These sort of regulations seem to have the effect of keeping more people in the middle class. I don't like raising the limit or messing with what exists now partially because what's there is absurd. The government wants to blame the market for its own failures and bad actions but it's not true. Even Bernie Madoff is a direct result of the Fed killing yield causing investors to seek returns wherever they could find them. Dodd is in the pocket of the bankers and always has been. This last reform bill is a final gift to the elites on his way out the door. These sort of rules only strengthen the Fed and its control over the banking system. Not sure why anyone would be listening to Dodd and hoping he would do some good in the world.
- vaksel 16y ago
  because not everyone invests in Google...for every Google there are thousands of companies that crash and burn. Just look at YC, a savvy investor by any metric, with hundreds of startups under their belt...and they had what 20 exits? It's easy to sell a startup investment to non-savvy investors..."invest X into our company and 5 years from now you'll be a millionaire!" A millionaire can afford to lose 50-100K on a bad investment, someone making $40-50K a year cannot afford to lose even 15K.
  - jswinghammer 16y ago
    Can't they decide that? Wouldn't they be in the best position to know that first hand? Why do you think you know better? How could you possibly know better? The same argument exists for why Social Security is a good idea. Right now the government takes 15% of my income while saying they know how to spend it better than I do. They've started wars, bailed out G.M., the banks, and whoever else has paid them off. It seems like they're not to be trusted with much of anything that matters.
jplewicke 16y ago
I'd love to see the cap changed to allow smaller investments by currently non-accredited investment. If we replaced the hard asset/income cut-off with an amount indexed by either income or assets, it would make crowdfunding of small businesses a viable option. Since regulators don't want to see "Middle class family's life savings wiped out in investment fraud," allowing people to invest up to 3-5% of annual income or 2% of total assets in a given business would create additional sources of funding, prevent any one startup failure from being personally damaging, and give individuals the chance to invest locally in growing businesses. This wouldn't have made sense twenty years ago, but the administrative requirements can be a lot more easily amortized by a central crowdfunding platform these days.
- anigbrowl 16y ago
  You raise a good point, although there might be some difficulty with legislation requiring people to declare their income to investment vehicles. The basic problem is that while something like Diaspora can attract goodwill funding by being in the right place at the right time - I kicked them $25 in exchange for a t-shirt and the vague hope that they can advance the state of distributed network services. But most people who want to invest in something are looking for an ownership stake, and as soon as you offer them that you've initiated a much more complex contractual relationship and are subject to a very different legal regime. Rather than an income percentage cap, there might be some mileage in a small monetary amount. For example, commercial transactions of goods above and below $500 are treated differently. There are already provisions in Regulation D for companies that don't need to raise more than $1m or $5m in a single year, which might be great for startups, but those companies appear to have less of a legal 'safe harbor' than those which can raise an unlimited amount. The 'safe harbor' provision is in SEC regulation D, rule 506: http://www.law.uc.edu/CCL/33ActRls/rule506.html http://www.law.uc.edu/CCL/33ActRls/rule506.html in subclause (a), it's the exemption from rule 4(2) of the Securities Act of 1933 which gives firms the legal security blanket. Although rules 504 and 505 limit issuers to smaller amounts (but still quite sufficient for many new businesses), they don't have that specific exemption, and so the founders are implicitly subject to the prohibitions on selling or offering shares across state lines.
  - 16y ago

57 points by grellas 16y ago

grellas 16y ago

Here are some relevant links about this across the web touching on the effects of the Bond/Dodd amendments: http://www.angelcapitalassociation.org/resources/public-policy/federal-policy-issues/highlights/ http://www.angelcapitalassociation.org/resources/public-poli... (statement by Angel Capital Association with links to primary sources) http://dodd.senate.gov/?q=node/5629 http://dodd.senate.gov/?q=node/5629 (statement from Senator Dodd's website) http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/RegulationDReform/tabid/546/Default.aspx http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/... (with links to primary sources) http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-using-the-secs-logo-1.html http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-u... (with discussion of certain remaining problems with the amendment language) http://online.wsj.com/article/SB10001424052748703957904575252430233003388.html?mod=WSJ_Opinion_AboveLEFTTop http://online.wsj.com/article/SB1000142405274870395790457525... (WSJ editorial entitled "Angels (Back) in America" - behind paywall) http://martendale.com/government/article_Adams-Reese-LLP_1011518.htm http://martendale.com/government/article_Adams-Reese-LLP_101... (excellent technical discussion on where this stood a short while ago just as the amendments were being introduced) http://www.pehub.com/71242/up-the-bracket-dodds-discriminatory-deal/ http://www.pehub.com/71242/up-the-bracket-dodds-discriminato... (a strongly expressed negative view of the compromise, arguing that excluding value of principal residence is harmful and emphasizing that the accredited investor rules should be liberalized so that more and more people can invest - strongest point: the same people who block small investors from investing in startups also strongly push state lottery systems that do far more harm to small "investors" than startup investing would ever do)

gte910h 16y ago
I find the comparison of a state lottery, which is something completely not personally sold, to investment in a business, pressured by friends, family, or by random salespeople, to be in such different categories, the comparison is disingenuous. Additionally, the lotteries require an infinitesimal expenditure compared to startup funding. While I agree with the pehub poster that the portion about housing and mortgages is off, I would suggest that liquid assets - all liabilities be used as a gauge of net worth, then lower the floor to something more like 700k.
- jswinghammer 16y ago
  Clearly you've never lived in a major city or around poorer people. I've seen people drop the kind of money that would make me cringe to spend on lottery tickets every week for the last 10 years that I've lived in Boston. It's a joke to suggest that people are pressuring family to invest in their companies in the same way that the lottery pushes itself on those least able to afford it. The lottery is a lot more effective at preying on its victims than any salesmen that I've ever met. The lottery is a tax on the poor dressed up to look good by politicians who seek to gain from it. A single lottery ticket is nothing but the people I see never just buy one. They buy a lot of them.
  - enjo 16y ago
    It does happen. I've met more than one family where an elderly mother and/or father where forced back into working because they invested in their entire life-savings into their child's (or nephew's, niece's, etc...) hair-brained get-rich-quick scheme. That said, I don't see how it's governments role to make sure people don't screw themselves over. Bring on casinos, lotteries, and open investement as far as I'm concerned.
    - jswinghammer 16y ago
      I agree with the exception of the lottery. I'd rather not have the state involved in this. I just don't like my tax money funding (even if the lottery more than pays for itself) something I consider immoral.

jswinghammer 16y ago

I've never really understood the reasons for limiting investors in companies to those who are already rich. The current crisis was in no way caused by anyone investing in startups or small businesses. The crisis was caused by too much credit flowing into all the wrong hands due to the incentives that existed for that to happen. The crisis of 1929 had the same cause. The problem is inflation plain and simple. The animal spirits that Keynesians are invoking now were not the cause of the housing bust-the fundamentals just were not there. They weren't ever there. Inflation hid that fact for years from many people. These sort of regulations seem to have the effect of keeping more people in the middle class. I don't like raising the limit or messing with what exists now partially because what's there is absurd. The government wants to blame the market for its own failures and bad actions but it's not true. Even Bernie Madoff is a direct result of the Fed killing yield causing investors to seek returns wherever they could find them. Dodd is in the pocket of the bankers and always has been. This last reform bill is a final gift to the elites on his way out the door. These sort of rules only strengthen the Fed and its control over the banking system. Not sure why anyone would be listening to Dodd and hoping he would do some good in the world.

vaksel 16y ago
because not everyone invests in Google...for every Google there are thousands of companies that crash and burn. Just look at YC, a savvy investor by any metric, with hundreds of startups under their belt...and they had what 20 exits? It's easy to sell a startup investment to non-savvy investors..."invest X into our company and 5 years from now you'll be a millionaire!" A millionaire can afford to lose 50-100K on a bad investment, someone making $40-50K a year cannot afford to lose even 15K.
- jswinghammer 16y ago
  Can't they decide that? Wouldn't they be in the best position to know that first hand? Why do you think you know better? How could you possibly know better? The same argument exists for why Social Security is a good idea. Right now the government takes 15% of my income while saying they know how to spend it better than I do. They've started wars, bailed out G.M., the banks, and whoever else has paid them off. It seems like they're not to be trusted with much of anything that matters.

jplewicke 16y ago

I'd love to see the cap changed to allow smaller investments by currently non-accredited investment. If we replaced the hard asset/income cut-off with an amount indexed by either income or assets, it would make crowdfunding of small businesses a viable option. Since regulators don't want to see "Middle class family's life savings wiped out in investment fraud," allowing people to invest up to 3-5% of annual income or 2% of total assets in a given business would create additional sources of funding, prevent any one startup failure from being personally damaging, and give individuals the chance to invest locally in growing businesses. This wouldn't have made sense twenty years ago, but the administrative requirements can be a lot more easily amortized by a central crowdfunding platform these days.

anigbrowl 16y ago
You raise a good point, although there might be some difficulty with legislation requiring people to declare their income to investment vehicles. The basic problem is that while something like Diaspora can attract goodwill funding by being in the right place at the right time - I kicked them $25 in exchange for a t-shirt and the vague hope that they can advance the state of distributed network services. But most people who want to invest in something are looking for an ownership stake, and as soon as you offer them that you've initiated a much more complex contractual relationship and are subject to a very different legal regime. Rather than an income percentage cap, there might be some mileage in a small monetary amount. For example, commercial transactions of goods above and below $500 are treated differently. There are already provisions in Regulation D for companies that don't need to raise more than $1m or $5m in a single year, which might be great for startups, but those companies appear to have less of a legal 'safe harbor' than those which can raise an unlimited amount. The 'safe harbor' provision is in SEC regulation D, rule 506: http://www.law.uc.edu/CCL/33ActRls/rule506.html http://www.law.uc.edu/CCL/33ActRls/rule506.html in subclause (a), it's the exemption from rule 4(2) of the Securities Act of 1933 which gives firms the legal security blanket. Although rules 504 and 505 limit issuers to smaller amounts (but still quite sufficient for many new businesses), they don't have that specific exemption, and so the founders are implicitly subject to the prohibitions on selling or offering shares across state lines.
- 16y ago