Dodd Bill Update: Listening to the Market

4/23/10Follow @geshwiler

Like an entrepreneur listening to market feedback while designing a product, Senator Christopher Dodd (D-Conn) has made some improvements to features of his pending legislation that we described last month. Originally designed to fight the “too big to fail” problem in the financial markets, many constituents—including the Angel Capital Association and the National Venture Capital Association—have highlighted that it could inadvertently render startups “too small to succeed.” These new enhancements are steps in the right direction. The legislation is still pending, however, and other voices—particularly state regulators seeking more power—could oppose the amendments and hinder entrepreneurs.

Senator Dodd has proposed two amendments to his own legislation based on feedback from the entrepreneurial community. One would leave the current standard for accredited investor at a net worth of $1 million (as previously proposed, the bill would have more than doubled this figure) but would add a new provision that the calculation would exclude the value of the investor’s primary residence. It also would allow the Securities and Exchange Commission to revisit the definition periodically. The other amendment would maintain regulatory consistency across states for entrepreneurs raising money while disqualifying parties who have been identified as “bad actors” by state or federal regulators.

While no change to the accreditation standard would have been preferable, Dodd’s new approach is a reasonable compromise. The change to the regulatory environment provides uniformity for entrepreneurs while increasing investor protections for all types of private fund raising.

Many state regulators reportedly are still continuing to seek to expand their control over private fund raising and might oppose these positive steps for entrepreneurs. We hope Senator Dodd and his colleagues continue their support of entrepreneurship, job creation, and economic growth and pass the legislation and these amendments.

James Geshwiler, a managing director at CommonAngels for more than 10 years, has financed over 40 software and Internet companies and worked with them through over 100 rounds of investment and related changes in boards of directors. [Editor's note: CommonAngels is the lead investor in Xconomy.] Follow @geshwiler

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  • Leon Liebman

    There should be no control or wealth standards over “small” angel investments. Perhaps under $15,000. (We don’t monitor or regulate a $15,000 automobile purchase. Why do we need a “big brother” having influence over a personal investment decision of modest amount?
    We need a smoothly operating national market. In one investment I led the participants came from Montana, Pennsylvania and Delaware. Would this deal, if state powers are greater and need to be resolved before a multi-state deal can be closed, ever close with the involvement of public employees? No. Fewer startups will emerge, less good ideas launched and fewer jobs created if we have added state meddling.
    If it works don’t fix it. The present system works.

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  • Tom Tierney

    Imagine you were a programmer with Google, in your mid-twenties and after some hard work
    and Google’s IPO, your stock option grants were now worth $500K. You are single, no
    mortgage payments and little, if any debt.

    A friend you’ve worked with at Google is looking to raise $100K from 4 close friends. You each put in $25K ($100K total) for 50% of the company. Your friend thinks he can sell this software back to Google or maybe even Yahoo for $20M after 2 years of development.

    After 1.5 years, the software is demonstrated to Google and is in beta testing with some
    customers. Google decides to buy the software for something in the $20M-$30M range.

    The original investors (angels) each get back 100X their $25K investment or $2.5M. They
    helped create a few jobs and some new technology that became basically an R&D purchase
    for a large company. They took a measured risk, with some *of their own* risk capital and
    were successful. Isn’t this what America is suppose to be all about?

    In Chris Dodd’s world, this opportunity isn’t available, these “angels” haven’t met the
    criteria set arbitrarily by the government for success. These guys are too small to
    succeed.

  • John

    What in the world is the point of this limitation in the first place? Were angel investors responsible for the real estate bubble? What is the rationale?

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