What is the attack on Reg D? The attack on Reg D is contained in a bill proposed by Sen. Christopher Dodd that would do two things: (a) Senator Dodd's bill would allow states to again regulate offerings that meet Reg D requirements, and (b) Senator Dodd's bill would require the SEC to narrow the universe of individual investors who would be allowed to invest in startup companies. If Senator Dodd's bill is passed and becomes law, then all 50 states would be free to impose their own requirements on seed financings for start ups, and none of those rules would have to be consistent with a national standard. Also, while Senator Dodd's bill does not set precise, new thresholds for being eligible to be an investor, it does mandate a process that could, potentially, knock out all but the super-rich from investing in startup companies.
Senator Dodd is retiring. Doesn’t that mean that his attack on Reg D is dead? I wish that were so. Unfortunately, both Senator Dodd, and his counterpart on financial regulatory reform in the House, Representative Barney Frank, have said that their work on financial regulatory reform, presumably including efforts to pass Senator Dodd's bill, will continue.
Who would want to kill Reg D? Best I can tell, the move to gut Reg D is championed by state securities regulators. Published articles indicate that state securities regulators are concerned about abusive and predatory offerings where unsophisticated investors are preyed upon by unscrupulous broker dealers or placement agents. Recently, I have been told that state securities regulators are also worried about offerings by issuers, but I have yet to learn more about those accounts.
Would there be another way to address abuses? Yes, I think so. Rather than gut Reg D, which does so much to facilitate the formation of startup capital for tech and other entrepreneurs in this country, the SEC and state regulators could be further empowered to regulate offerings that may pay lip service to Reg D, but don't actually meet existing Reg D requirements. For example, if Reg D were clarified to underscore that an issuer must have a pre-existing business relationship with its investors, the current, successful and prevalent practice of the tech startup community would be preserved, and offerings synidcated by placement agents might have to follow other, more stringent rules.
Why does the National Venture Capital Association remain silent on this? This organization refuses to take a public position on the issue, but in backchannels has indicated that the proposed changes to Reg D are primarily "angel" issues and not a priority for the professional venture capital funds and managers that it represents. For reasons put succinctly and best by Fred Wilson, it is a huge mistake to think that angel financing is not important to entrepreneurs and the whole eco-system by which tech ventures are founded and financed.
What are the next steps? For me, to try to find out more about what state securities regulators perceive to be the problems. For folks looking at this issue for the first time, you may want to consider writing your elected representatives.