There is a new banking bill being passed through senate right now, which unfortunately, is not very good for start ups.The bill is being sponsored by Chris Dodd, Chairman of the Senate Banking Committee. It’s name really makes me angry, “‘‘Restoring American Financial Stability Act of 2010’’. But I digress. For the sake of saying that name too many times, let’s call it, “CDBB” (Chris Dodd Banking Bill) .
So you may be asking yourself what the bill has to do with start ups and why you should care. Well, the sad part is it includes two provisions that are extremely problematic to entrepreneurs with young start ups. Let’s take a look at the two and then review:
1) Changing the definition of a “qualified investor” in angel investor and venture capitalist deals. Gone are the days where anyone can invest in a start up company. You have to be a qualified investor. A qualified investor is currently defined as anyone with a net worth of over $1mm or net yearly income of over $250,000. CDBB would increase that number to $2.3mm and $450k respectively. Think that is bad? Well CDBB is also going to index those numbers to inflation.
2) Eliminate the existing federal pre-emption over state regulation of “accredited offerings.” Angel and V.C. investments could be regulated state by state. This is a pain in the butt, because now every deal will be subject to state laws, rules & regulations- causing deals to be far more troublesome. At this moment, there is a federal pre-emption that makes getting these kinds of deals done fairly easy.
I have no idea why either of these provisions ended up in a bill designed to regulate the banking industry. Entrepreneurs and start-ups don’t use banks to finance them. It’s incredibly hard for that to happen. Usually the capital start ups get is from Angels or V.C.’s. Our system right now works well, it didn’t come to a crash in 2008 and right now there is no need for a reform. The CDBB’s provisions stated above are ridiculous.
The truth is, family or friend money could once spawn a business. Now, that $25,000 that your best friend was going to put into your start up, he can’t do it!! According to the CDBB he will have to a an accredited investor A.K.A. a millionaire. There is a fine line here between some people just going for broke with a start up and mortgaging their home and some people taking an educated risk, but there is absolutely no need for these provisions.
Entrepreneurs, Start ups, Venture Capitalists, Angels, etc. The work they do is priceless to our economies health. Why would we want to tighten down on them? If anything, we should be loosening the belt. Please call your senators and help make this bill a passing nightmare.
The details you will need when calling your senator are:
You can find your senator at the USA.gov’s website.
The section numbers in question are Sec. 412 for accredited investors and Sec. 926 for federal pre-emption or Reg D.
The actual bill is located here.
