

Tell HN: Senator Dodd Has Mostly Listened Concerning Regulation D - grellas

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):<p>(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<p>(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.<p>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.<p>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.<p>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.<p>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.<p>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.<p>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.<p>I will link to some of the partial reports of this in a comment.
======
grellas
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-
poli...](http://www.angelcapitalassociation.org/resources/public-
policy/federal-policy-issues/highlights/) (statement by Angel Capital
Association with links to primary sources)

<http://dodd.senate.gov/?q=node/5629> (statement from Senator Dodd's website)

[http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/...](http://www.reit.com/PolicyPolitics/FederalNonTaxLegislation/RegulationDReform/tabid/546/Default.aspx)
(with links to primary sources)

[http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-u...](http://www.thecorporatecounsel.net/Blog/2010/05/prohibited-
using-the-secs-logo-1.html) (with discussion of certain remaining problems
with the amendment language)

[http://online.wsj.com/article/SB1000142405274870395790457525...](http://online.wsj.com/article/SB10001424052748703957904575252430233003388.html?mod=WSJ_Opinion_AboveLEFTTop)
(WSJ editorial entitled "Angels (Back) in America" - behind paywall)

[http://martendale.com/government/article_Adams-Reese-
LLP_101...](http://martendale.com/government/article_Adams-Reese-
LLP_1011518.htm) (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-
discriminato...](http://www.pehub.com/71242/up-the-bracket-dodds-
discriminatory-deal/) (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
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
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
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
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.

~~~
detst
How is your tax money funding the lottery when you admit that it more than
pays for itself?

In fact, the lottery where I live pays hundreds of millions of dollars into a
school fund every year; money that your tax dollars otherwise would have to
pay for.

~~~
jswinghammer
I suppose I have to support some of the infrastructure it uses before it
becomes profitable. I just don't want the state involved in that sort of
activity. It's the same reason I wouldn't like war even if we paid for it with
the spoils.

------
jswinghammer
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.

~~~
pwhelan
"Even Bernie Madoff is a direct result of the Fed killing yield causing
investors to seek returns wherever they could find them."

You make the right point about the fundamentals not being there for the
housing bust. However it is hard for me to take you seriously when you say
things like the above. Investors are always seeking heavy returns -- and
Madoff didn't start a Ponzi scheme because of the Fed he did it because he is
greedy.

~~~
jswinghammer
When banks are offering 1% on deposits you are going to have weird situations
arise where actors in the market are seeking yield on their money. Even
Geithner acknowledged that.

------
jplewicke
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
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> 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.

~~~
_delirium
On the last point, some regions have "coordinated review" setups where you can
simultaneously offer a <$1m, rule-504 security across some state lines, within
the region (you can also submit simultaneously to multiple regions):
<http://www.coordinatedreview.org/crscor.html>

37 of the 50 states participate in one of the five regions, but California and
New York are two glaring omissions.

