Angel investors and startup entrepreneurs should, on the face of it, have much reason to rejoice this morning: In the contentious financial reform battle, the only bipartisan love-in turned out to be on the subject of angel investment.
Unfortunately, the struggle is far from over.
Last night, the Senate quietly accepted a bipartisan amendment sponsored by Senators Kit Bond and Chris Dodd (last teamed up on 1997’s Family Leave Act). It was co-sponsored by Democratic Senators Mark Warner, Maria Cantwell and Mark Begich, with a special co-sponsoring appearance by Republican Scott Brown. The biggest change in the new amendment is getting rid of a provision that no one wanted; the rest of the bill just kicks the can four years down the road.
peHUB examined this issue last week, when we highlighted the objections of some angel investors to the original legislation and recounted how political sausage-making forced some compromises in the bill. The whole thing has been a bit of a struggle. The Angel Capital Association told peHUB last week that it was initially opposed to many aspects of the changes, but had to take what they could get. Today, the ACA seems pretty happy with its progress.
Here’s a quick before and after for comparison:
- Before: Angel investors not required to do anything but file a Form D with federal regulators and then maybe run through sunlit fields of daffodils.
Initial reform proposal: Provision requiring 120-day review of angel investor transactions.
After: The 120-day provision is struck down – no surprise, since no one wanted it. Both adding this provision and taking it out is probably a bit of political theater. Remember that Denise Crawford, the head of the pro-reform North American Securities Administrators Association, told us, “We think that somebody put that into the bill with the specific intent of blowing it up; it doesn’t work for anybody; not capital raisers and not for investors. It’s a very bad idea.”
Upshot: Great, but this was really never any threat to the angel community anyway. An easy way to make something look like a political compromise is to add a rule that everyone hates, then take it out in a concession to both sides.
- Before: Angel investors required to have $1 million in net worth.
Initial reform proposal: Provision requiring angel investors to show $2.5 million in net worth.
Midpoint: Angel investors would have to have income of $200,000 and net worth of $1 million, not counting their houses. Regulators will review the net-worth requirement every year.
After: Nothing about income. Angel investors would need to have net worth of up to $1 million, not including their houses, but they can include their spouse’s assets in the calculation. (Do a lot of angels marry rich?). Regulators will review the net-worth requirement every four years.
Upshot: Not a bad compromise, but not too far from the current status quo. State securities regulators want to protect investors who have a lot of land, but no money, from putting their houses in hock to schemers like Allen Stanford and getting hit with financial losses they can’t take. The ACA doesn’t want it to be impossible to become an angel investor, particularly when startups are finding it so hard to raise money. Both sides can sit tight for a while, but expect this to blow up again politically well before the four-year requirement is up.
- Way before: In the era before 1996, there were “bad boy” provisions in the law that gave state securities regulators the ability to use prior convictions to chase down any crooks selling securities through private placements.
Slightly before: After 1996, the “bad-boy” provisions were gone. State regulators were allowed to prosecute hucksters, but they had no right to request actual offering documents. It’s hard to build a credible case without them.
Initial reform proposal: Angels would have to file private-placement documents to state regulators as well as Federal ones.
After: Angel investors don’t have to change who they file to. The “bad actor” provisions are back, forbidding anyone with a criminal record or who has fallen afoul of state regulators to get involved in securities offerings for 10 years. But that part of the bill still has about one year to actually take effect.
Upshot: Another kicked can; since the bad-boy provision has another year before being enacted, expect a political fight within the next year about this.
There is more, of course. TheCorporateCounsel.net blog has many other legal questions, like whether investors may be forced to settle with state regulators so that they don’t end up with a “bad boy” mark on their permanent records.
In the end, the final amendment is fairly close to the status quo, with some victories for the ACA and some for NASAA. But both industry groups have already told us they’re preparing to debate this for years and perhaps appeal to the SEC for changes instead of relying on Congress – so complacency won’t be rewarded.