Senate Bill Threatens Angel Investing

Senator Christopher Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, is continuing to push his Restoring American Financial Stability Act of 2010 Bill.  On the surface, the bill is designed to protect Americans from many of the banking practices that drove us into this financial crisis.  Buried in the fine print of the 1300+ page bill, however, are provisions that will seriously handcuff angel investors and start-ups seeking seed funding (see Sections 412 and 926).

There are two main issues at stake.  First, the bill aims to raise the minimum net worth and annual earnings required for investors to be accredited.  Second, accredited offerings regulations for “small” investments will change hands from federal to state commissions.  Fred Wilson summed up the effects in his blog post Startups Get Hit By Shrapnel In The Banking Bill:

1) Changing the definition of a “qualified investor” in angel and venture deals. Not just anyone can invest in a startup company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net income of over $250k. Dodd’s bill would increase that to $2.3mm and $450k respectively. And then index those numbers to inflation.

2) Eliminate the existing federal pre-emption over state regulation of “accredited offerings.” Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.

 Bill Carleton and Joe Wallin also weighed in on the issue in John Cook’s Venture Blog on Seattle’s TechFlash: Dodd’s Attack on Angel Financing

And John Mauldin makes similar comments in his widely read weekly update: First Let’s Kill the Angels.

Even the Wall Street Journal has taken note of the outcry from the investment community: Dodd Bill’s Accredited Investor Rules Draw Fire

We want to echo the sentiments of these posts, in that we encourage you to get educated and get actively involved in eliminating these provisions from the bill.

New Investing Models Emerging

It’s no secret that the recent economic troubles have changed the investing landscape.  As VCs continue to pull in the reins on seed investing, angels have taken up the slack.  In addition to traditional angel groups such as ATIF, new models of connecting start-ups to investors are starting to emerge.  We’ve found two of these models that we think are worth mentioning.

The first is featured in this April 7^th Wall Street Journal article:

                New Service Aims To Enable ‘Peer-To-Peer’ Early Investing

This article describes the Texas-based MicroVentures, which claims to be the first in the industry to merge “peer-to-peer lending with the venture capital industry.” (microventures.com/about-us).  It remains to be seen if this model can gain traction, but I like the use of technology to enable investment connections.

The second example has a bit more traction.  It is a service provided by Venture Hacks called StartupList.  VentureHacks has identified hundreds of angel investors they claim are actively looking for new deals, particularly internet startups.  They describe the process like this:

It’s a weekly email we send to AngelList, with 3 high-quality startups who want intros. Here’s how it works: you send us your pitch, we review it and, every Monday, we email the best 3 startups of the week to AngelList. (venturehack.com)

They describe the process in more detail, and outline the way for investors to get involved on this blog post:

                Launch: StartupList — a new way to reach angels

We do want to emphasize to ATIF members that with this market shift, scammers will invariably emerge.  Entrepreneurs and investors should beware the possibility of scams and unfulfilled promises.

These models should also be reviewed in the light of the new financial regulation bill.  The bill could significantly curtail these nascent efforts to encourage and support angel investment.