Senate Vote to Save Startup Seed Financing and Angel Investing Could be Monday

Now is the time to call or email your Senators in Washington DC to let them know they should vote for SA 4037, introduced yesterday by Senator Bond of Missouri and co-sponsored by Senators Cantwell of Washington, Warner of Virginia and Brown of Massachusetts.

As readers of this blog know, Senator Dodd's financial regulatory reform bill (in recent days, identified colloquially as the Wall Street Reform Bill), currently being debated on the floor of the Senate, contains two provisions that would be devastating to startup seed financing and angel investing in our country.

Sen. Bond's amendment is a fix that should now be supported by the entire startup ecosystem.

Sen. Bond's amendment would largely preserve the ability of entrepreneurs to raise startup seed capital, and for angel investors to support startups.

A few weeks ago in TechFlash, Dan Rosen, Joe Wallin and I wrote about a prior draft of Senator Bond's amendment, and as we said at the time, the language represents a compromise. It's not perfect. For instance, on the accredited investor net worth test, the value of a person's primary residence would be excluded from, would not count toward, the necessary $1 million threshold. 

On the other hand, Rule 506 under Regulation D is probably improved: under Sen. Bond's amendment, bad actors would be disqualified from relying on the federal exemption, and unequivocally deprived of hiding from state authorities under the cover of federal preemption. (It is this federal preemption that is so key to the viability of start up seed financing in America: without it, startups raising even just a modest amount of seed capital would have to comply, potentially, with the differing laws of multiple states. Right now, they rely on just one, uniform set of federal rules. Sen. Bond's amendment would preserve and protect this.)

This compromise is a result of the efforts of the Angel Capital Association and angel groups throughout the country. In particular, Marianne Hudson, Executive Director of the Angel Capital Association, has been an amazingly effective leader. Whatever the outcome for Sen. Dodd's bill, something has already changed in Washington DC because of this effort: Congress now knows that the venture capital industry does not speak exclusively for the startup ecosystem, that angel investors are out there, too, and that most startups in America are backed by angels.

Below is the text of the amendment, from the Congressional Record. Thanks as always to Bret Masterson of Joe's firm for pulling the record as soon as it hits. The link in the first paragraph of this post should take you to a pdf of a page from the Congressional Record containing this same text. Update: Joe has a good set of bullets on his blog, summarizing what Sen. Bond's amendment does.

SA 4037. Mr. BOND (for himself, Mr. WARNER, Mr. BROWN of Massachusetts, and Ms. CANTWELL) submitted an amendment intended to be proposed to amendment SA 3739 proposed by Mr. REID (for Mr. DODD (for himself and Mrs. LINCOLN)) to the bill S. 3217, to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ``too big to fail'', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes; which was ordered to lie on the table; as follows:

    On page 387, strike line 13 and all that follows through page 388, line 3, and insert the following:

   SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD.

    (a) In General.--The Commission shall adjust any net worth standard for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, so that the individual net worth of any natural person, or joint net worth with the spouse of that person, at the time of purchase, is more than $1,000,000 (as such amount is adjusted periodically by rule of the Commission), excluding the value of the primary residence of such natural person, except that during the 4-year period that begins on the date of enactment of this Act, the net worth standard shall be $1,000,000, excluding the value of the primary residence of such natural person.

    (b) Review and Adjustment.--

    (1) INITIAL REVIEW AND ADJUSTMENT.--

    (A) INITIAL REVIEW.--The Commission may undertake a review of the definition of the term ``accredited investor'', as such term applies to natural persons, to determine whether the requirements of the definition, excluding the requirement relating to the net worth standard described in subsection (a), should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.

    (B) ADJUSTMENT OR MODIFICATION.--Upon completion of a review under subparagraph (A), the Commission may, by notice and comment rulemaking, make such adjustments to the definition of the term ``accredited investor'', excluding adjusting or modifying the requirement relating to the net worth standard described in subsection (a), as such term applies to natural persons, as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.

    (2) SUBSEQUENT REVIEWS AND ADJUSTMENT.--

    (A) SUBSEQUENT REVIEWS.--Not earlier than 4 years after the date of enactment of this Act, and not less frequently than once every 4 years thereafter, the Commission shall undertake a review of the definition, in its entirety, of the term ``accredited investor'', as such term applies to natural persons, to determine whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.

    (B) ADJUSTMENT OR MODIFICATION.--Upon completion of a review under subparagraph (A), the Commission may, by notice and comment rulemaking, make such adjustments to the definition of the term ``accredited investor'', as such term applies to natural persons, as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.

    On page 388, line 14, strike ``1 year'' and insert ``3 years''.

    On page 998, strike line 12 and all that follows through page 1001, line 25, and insert the following:

   SEC. 926. DISQUALIFYING FELONS AND OTHER ``BAD ACTORS'' FROM REGULATION D OFFERINGS.

    Not later than 1 year after the date of enactment of this Act, the Commission shall issue rules for the disqualification of offerings and sales of securities made under section 230.506 of title 17, Code of Federal Regulations, that--

    (1) are substantially similar to the provisions of section 230.262 of title 17, Code of Federal Regulations, or any successor thereto; and

    (2) disqualify any offering or sale of securities by a person that--

    (A) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that--

    (i) bars the person from--

    (I) association with an entity regulated by such commission, authority, agency, or officer;

    (II) engaging in the business of securities, insurance, or banking; or

    (III) engaging in savings association or credit union activities; or

    (ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offering statement; or

    (B) has been convicted of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission.