On That SEC “Review” of Angel Investments…

Bob Litan, vice president for research and policy at the Kauffman Foundation, stirred up the VC community yesterday with a HuffPo piece about how Chris Dodd’s financial reform bill is bad for angel investors.

The general sentiment is nothing new to peHUB readers, as I’ve previously criticized Dodd Bill provisions that would raise the accredited investor threshhold (thus draining the angel pool) and preempt the federal regulation for Form D (thus making it more complicated/costly for startups to raise money from investors in multiple states).

But Litan finds another interesting nugget, writing:

Under existing law, startup companies can raise money easily and quickly from “accredited investors” — individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

Since reading Litan’s post, I’ve read and reread Section 926 (it begins on page 816 of this document).Unfortunately — or perhaps fortunately — I don’t see the same cause of alarm.

First, the section does not make any specific reference to angel investments as opposed to other types of venture investment. Instead, it is speaking about all private issuers that try to take advantage of safe harbor via Regulation D. Such companies already are required to file basic documentation with the SEC, and untold numbers of angel-backed companies have done so. Such filings are not always necessary — companies can simply believe they satisfy Rule 4(2) and cross their fingers — but are commonplace (particularly if friends or family are among the individual investors). And, again, the Dodd Bill is specifically referring to companies that have opted for the Regulation D route.

Moreover, Litan believes that the 120 review period is a “waiting period” — a term he implied in his HuffPo item, and which he explicitly used during a phone conversation earlier today. He may be proven right, but I don’t actually see that in Section 926. Instead, it seems that companies will be required to submit documentation about transactions that either are in process or which have concluded, just as they do today under Regulation D.

The new bill does add some state oversight into the mix — that noxious preemption of federal oversight of Regulation D — but doesn’t say that the SEC can put a three-month hold on angel investment. Moreover, the SEC already permits oversight of Form D filings via its Division of Corporate Finance.

Look, I’m not thrilled that any of these changes to Regulation D are being made. And I stipulate that any new beurocratic involvement can only be bad news for startups and the angels who love them. But simply I don’t see this provision as a targeted strike on angel investors.

As an aside, I’ve again called the Senate Banking Committee to understand why any of these “small” provisions have been added to a bill explicitly designed to address “too big to fail.” When I get an answer, I’ll be certain to share… [Update: I share]


  • > As an aside, I’ve again called the Senate Banking Committee to understand why any of these
    > “small” provisions have been added to a bill explicitly designed to address “too big to fail.”
    > When I get an answer, I’ll be certain to share…

    Good luck with that! This is the same Congress that tucked a takeover of the student loan
    industry in a “health care reform bill”.

    I truly believe a lot of these bills are creatures of the folks who give money to the congressional
    campaign coffers. Don’t the folks who fund campaigns pass the legislation to Congress and
    Congress simply tucks it in the bill and deposits the money? How else can one explain the
    mentality that says, by the Speaker of the House no less: “Once we pass the bill, we’ll find out
    what’s in it.”

    These things are 2000 to 3000 page monsters that nobody really reads before voting.

    But, “follow the money” – “someone” is funding the language you are questioning and I
    believe it to be VCs.

  • Dan, thanks for updating us on this. Let us know what you find out!

  • I’m shocked. Shocked I tell you. Congress writes a law that two smart people both read and come to wholly different conclusions about what the supposedly plain language means.

    As an aside, Bob is one of the smartest people I’ve ever met. In addition to a PhD in econ he also has a JD and was an assistant U.S. attorney general during the Clinton Administration. I’ll go with Bob’s reading of the new rules until proven otherwise but again all this proves is Congress is once again getting in the way of economic recovery.


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