Looks 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
While 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.
I'm sorry, but this really sounds like a conspiracy theory. There are much saner ways to raise taxes on the rich -- even if you were inclined to be sneaky about it.
I 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.)
How 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
> 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.
I 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.)
Google uses startups for hiring inflow, I doubt they want to choke them off.
They do this simply because that is the only way for them to either get the talent of the startup, or get a competitor to start working on their behalf.
If the startup is successful, I doubt the founders would be particularly interested in giving it up without some compensation. If it isn't successful, then it doesn't matter, since Google will be able to recruit them for far less money once the startup is dead.
It is in every company's best interest to pay the people they hire below market rate for their work. The only benefit Google gets from this is that they know the people they recruit through acquisitions are capable of building things. It's a trade-off: is it better to acquire a company, knowing the people aren't losers? Or is it better to avoid having to pay market value, at the risk of picking up a loser every now and again?
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.
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.
That'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.)
See SamAtt's comment on other reasons "famous investors" are against this; the new net worth limits are arguably the least worst part of this, depending on how viciously the other parts play out.
I 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.
Please 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.
I had read it before as authorization, but you're right that it does command the SEC to raise the numbers at least every 5 years starting now, but it leaves the increases completely up to the SEC.
The "2.3m" figure is bullshit, the maximum that the SEC could possibly justify.
> it leaves the increases completely up to the SEC.
Not at all - it specifies the factor to be used.
They seem to have some leeway in the initial bump, but since they've been given their marching orders, it's absurd to think that they'll deviate much. Note that there will be no legal basis for arguing for such a deviation.
> The "2.3m" figure is bullshit, the maximum that the SEC could possibly justify.
Suppose that they go with $2M instead of $2.3M. Will you regard that "yeah, I was correct, you folks were crying wolf"?
Why 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).
Worst...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)
Yeah, 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.
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.
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.
I'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.
Angel 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?
This is the first link that comes up on Google when you search for "Small Business Loan": http://www.merchantloans.com/. The first item listed under that heading is "Start/buy a business or franchise"
"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)
Yes, 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)
I don't buy that. Your whole argument is based around assets being worth enough to mitigate risk and they simply aren't. Taking the hot dog stand for example they're going to spend most of their money on merchandise and rent which aren't assets that can be repossessed. For those few assets that can be repossessed a bank has to go through petitioning a court to give them permission to repossess, then they have to pay someone to repossess the merchandise and then they have to pay to auction off the merchandise. That's a lot of money to spend for what amounts to some tables and a grill.
The same is true of most new businesses. Even those that create assets in their product (since the bank has to sell off something that people clearly weren't willing to buy from the original business).
As for high tech firms my whole point was that banks can't compete with Angel investors right now but if this law passes they'll have limited options which will push them towards the banks (which in turn is exactly what the banks want)
So, if I read you correctly you think that when angels no longer take the 'market' that banks will suddenly become interested in this kind of loan ? Do you see banks taking equity in start-ups ? Do you see start-ups that right now can't get money from banks but can get money from angels in this new environment suddenly getting bankloans ?
I really do not see that happening, if they could get their loans - at any condition - from banks today they would. The banks and the angels are not in competition because banks can't compete, they are not in competition because they don't want to compete.
> Small Business Loans are the #1 way that people start businesses in this country (no one Angel invests in a hot dog stand
Even if SBA loans are the number 1 way people start biz (Canada isn't the US), they're not the way people start biz that have new products or services.
No, you can't repossess the rent paid by a hot dog stand or its inventory, but a hot dog stand is fairly low risk. We know that people will buy hot dogs, so the only question is whether the applicant can manage to not screw up the cooking, can sell, can manage, and has a decent location.
Quora isn't going to get an SBA loan.
And, while I like hot dogs as much as the next guy, Quora and its ilk make a bigger difference.
There doesn't seem to be any shortage of the sort of things that the SBA funds.
Banks don't compete with angel financing, because any business capable of getting a bank loan would be crazy to take angel financing instead.
Suppose your company gets a bank loan. If the company is successful it pays back the loan with interest; if it's unsuccessful it goes broke and pays back nothing. The bank thus really hates lending money to companies with a significant chance of failure.
Suppose your company gets an angel investment instead. If the company goes broke it still pays zero, but if the company is successful then they'll have to pay a lot more than the principal back. If you can get a bank to lend you money it's stupid to sell off part of your company at damn near any valuation.
> If you can get a bank to lend you money it's stupid to sell off part of your company at damn near any valuation.
Exactly.
The only loop hole where banks are involuntary partners in funding a start-up is when a person uses their credit cards to fund their start-up. If the start-up fails (and they often do) it can put you in a world of trouble though.
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