

Get the Anti-Startup and Anti-Angel Provisions Struck From Dodd's Banking Bill - davidblerner
http://www.davidblerner.com/david_b_lerner/2010/03/get-the-antistartup-and-antiangel-provisions-struck-from-senator-dodds-banking-bill.html
There is a rather large missile rapidly approaching America's innovation culture. Predictably, it has been hurled in the most careless of manner by a group of uninformed politicians and their staffers in the form of Senator Dodd's sweeping Banking Bill. Putting aside the merits and thrust of the Bill itself, (which ostensibly seeks to regulate the banking industry), there are two provisions in it which, if not removed ASAP, will essentially wipe out a large chunk of one of America's engines of innovation- namely angel investing. These provisions will raise the bar on the definition of an 'accredited investor' from $1M in net worth or $250K in annual income to $2.3M in net worth or annual income of $450K! It will also hamstring angel investing by slapping any such investment with a 120 day SEC review.
======
hnsummary
Article Summary:

Buried inside of the new banking bill is a provision that will raise the
requirements to be an accredited investor. The new bill is proposed by Chris
Dodd, the senator from Connecticut. The requirements are increasing from $1m
in net worth or $250k in annual income to $2.3 million in net worth or $450k
in annual income. Angel investment will also have to undergo a 120 day SEC
review.

[http://hnsummary.com/2010/03/30/get-the-anti-startup-and-
ant...](http://hnsummary.com/2010/03/30/get-the-anti-startup-and-anti-angel-
provisions-struck-from-senator-dodds-banking-bill/)

~~~
credo
My understanding is that the $1M requirement was signed into law by Reagan in
the early 80s.

$2.3M is that amount adjusted for inflation.

You can make a case that the $1M limit was too low (at the time Reagan signed
the bill), but imo it doesn't make sense to argue that - in general - any
limit should not be adjusted for inflation

~~~
gridspy
However the costs to launch a business have also decreased in the mean time,
as have the size of angel investments.

~~~
jbooth
The thing is, they're not just dealing with startups -- they're also dealing
with fraudulent ventures calling themselves startups.

------
jbellis
My inner cynic wonders if the rest of the bill is as clueless about the other
industries it regulates, as it is about startups.

~~~
startuprules
the politicians aren't clueless; they know their job is to support the multi
conglomerates - killing competition and funneling taxpayer money to those
conglomerates via bailouts

~~~
credo
If that were the case, why is Wall Street lobbying against the Financial
reform bill ?

Most expectations are that Wall street will spend tens of millions of dollars
against the bill

~~~
hga
Who's saying it's not bad for many if not most companies?

------
tibbon
I'm confused why anyone would put this provision in a bill. Does anyone have
any background that might fill in the motivation here? They always talk about
being pro small business, but this seems fairly blatantly against it.

~~~
jplewicke
I think it's most likely an attempt to cut down on fraudulent hedge funds.
Currently, having "accredited investor" status is sufficient and usually
necessary to invest in hedge funds, prvate equity funds, and startups. During
the dénouement of the financial crisis, many mini-Madoffs were discovered,
usually in the $5-200 million range. Most of these were pyramid schemes
dressed up as hedge funds, but a few were fraudulent startups as well.

I think the main reason they're changing the definition of "accredited
investor" is because it also affects who can invest in hedge funds, not
because they're trying to affect startups per se. This is probably classic
"unintended consequences."

~~~
hga
I wasn't aware there were _many_ "mini-Madoffs"; I heard about one or two,
maybe three. Could you point us at a source to back that assertion up?

(One should also be cognizant of Buffet's "when the tide runs out, you see
who's been swimming naked". While I don't think he meant it in this way,
"genius is a rising market" and when the market goes down a lot of scams are
driven out into the open because they can no longer keep their game afloat.)

In general, great efforts have been made to paint hedge-funds as eeeeevil, but
with little to no evidence that I'm aware of (note Madoff was't running one
... in fact, didn't he make a big deal about his _very_ low management fees?).

And I don't see how this is related:

The ostensible purpose of this legislation is to decrease systemic risk.

Preventing smaller investors from making necessarily small investments in
whatever by definition isn't going to have much effect. The issues are big
numbers, not small ones. And how does the 120 day delay fit into this???

Devolving the regulation of these investments to the states might in theory
help, not that the SEC is a whole lot more useful than a potted plant (cd
Madoff).

Regulating VCs as hedge-funds makes _no_ sense whatsoever (that's not a point
you're making, but I can't help but wonder if they're related).

~~~
spamizbad
> I wasn't aware there were many "mini-Madoffs"; I heard about one or two,
> maybe three. Could you point us at a source to back that assertion up?

Off the top of my head: Wextrust.
<http://www.nytimes.com/2008/08/12/business/12wextrust.html>

I actually did some contract work for them in 2007, shortly before they were
busted. I was never paid beyond my retainer. I found out why it was so hard to
collect when the story broke in Crains Chicago. Normally I'd fight to get paid
but they're now in receivership and I don't feel like taking scraps from
charities and individuals who were wronged for so much more than I was.

edit: I understand that's just an anecdote, not real data. Basically media
coverage is rare if the scheme is less than $200 million. There are some
larger ones that never get attention because very wealthy people get taken and
don't want to be made fools of for investing into these companies. I've got
friends who work in the real estate business who've told me about several in
the Chicago area that have been taken down or are under investigation. It was
shockingly widespread, and I'd estimate there's easily thousands active
worldwide.

Here's an incomplete list of ones that made the press in 2009:
[http://madofffraud.boomja.com/Ponzi-Schemes-Reported-
in-2009...](http://madofffraud.boomja.com/Ponzi-Schemes-Reported-
in-2009-22206.html)

~~~
hga
Thing is, < 200 million US$ frauds aren't systemic risks. Yeah, we need to
police them, but they don't threaten the system. Madoff's only did because he
was such a "pillar of the community" (of Wall Street).

------
startuprules
It's clear that this administration is very much against startups....with
government takeover of many industries, healthscare bill designed to tax
investments/burden small companies with large health premiums, and now this.
What can we do? Well, unless we remove the politicians that keep voting for
these proposals, we will have no choice but to relocate to a friendlier
country that doesn't try to kill startups at its infancy. In this day and age,
anybody can launch a lean startup overseas.

~~~
JamieEi
Exactly which industries have been "taken over"?

~~~
startuprules
Auto, Banking, Student lending, Home Mortgage, Healthcare.

~~~
ghotli
I downvoted this because it's rather subjective as to what the definition of
"taken over" is and you provided no evidence to support your broad claims.

~~~
waterlesscloud
Student lending isn't subjective, it's completely taken over.

~~~
_pius
Not so much. The U.S. government has always assumed all of the risk on student
lending and was essentially just giving free money to certain private lenders
without getting anything in return. It's removing a layer of bureaucracy more
than it's a government takeover.

[http://www.coffeehousetalks.com/2010/03/landmark-day-for-
edu...](http://www.coffeehousetalks.com/2010/03/landmark-day-for-education-
finance.html)

~~~
waterlesscloud
The government was getting plenty in return, an educated populace.

That "bureaucracy" was a private industry. Now it's gone.

~~~
hga
Errr ... is the formerly private bureaucracy going to be replaced by ATMs or
the like?

I'm not aware of any claims that this will result in a net loss in loan
administration headcount.

~~~
lenley
Just like the "online tax industry" is fighting to keep the IRS and state tax
services from offering direct online tax filing.

I'd likely still use tax-prep software, but I'd like the option to file
directly to the irs without an intermediary trying to charge me for services.

I guess that would be another "government takeover." :|

~~~
hga
That just shuffles who in the private sector gets the data to the IRS,
although as long as they're successful they'll ensure the employment of more
government workers to oversee the paper to digital capture system.

I'm talking about the necessary people, wherever they are, who then have to
process the paper work, deal with random out of band requests, dun people who
don't pay up, etc. etc.

That work has to be done _somewhere_ (unless you prefer the model of Medicare
with it's low, low overhead and insane level of bogus claims).

