Committee created by Dodd-Frank at odds with JOBS Act startup financing reformsBy http://profile.typepad.com/1237764140s22740 // November 5, 2012 in Angels, General Solicitation, Legislation & Public Policy, VCs
Dodd-Frank wasn't just about Wall Street.
Dodd-Frank impacted the startup and emerging company ecosystem at its angel-financing source, as it amended the accredited investor definition to provide that the $1 million individual net worth threshold should exclude the value of the investor's principal residence. (It could have been worse, but angels got organized and stopped the more draconian proposals.)
Now, another Dodd-Frank provision, seemingly not pertinent to angel or venture capital investing, looks like it could have an impact on the innovation economy.
This other provision is Section 911 of Dodd-Frank, which establishes an "Investor Advisory Committee," the purpose of which is to:
"advise and consult with the [Securities and Exchange] Commission on regulatory priorities of the Commission; issues relating to the regulation of securities products, trading strategies, and fee structures, and the effectiveness of disclosure; initiatives to protect investor interest; and initiatives to promote investor confidence and the integrity of the securities marketplace; and submit to the Commission such findings and recommendations as the Committee determines are appropriate, including recommendations for proposed legislative changes."
There is little in that purpose statement to suggest that the Investor Advisory Committee should concern itself with startup seed financing.
True, the broad phrase, "initiatives to protect investor interest," could encompass any investing activity; but taken in context, would you expect that the Committee should interpret that phrase so as to compel it to comment on implementation of private capital formation reforms under the JOBS Act?
A lawyer friend looked into the stated affiliations of those who serve on the Investor Advisory Committee. "Not an angel or venture lawyer on this thing," he reported.
Is the lack of an angel, venture lawyer or entrepreneur advocate a deficiency, or does that omission speak to an intention that the Committee should restrict itself to public securities and retail markets? Among the members that Dodd-Frank says the Committee should include are representatives of state securities regulators, senior citizens, investors in mutual funds, pension funds and registered investment companies.
Well, whatever the Congressional intent and however inappropriate it may be for the Investor Advisory Committee to be commenting on angel and venture investing, the Committee, in its first months of activity, has issued recommendations to the SEC on implementation of the lifting of the ban on general solicitation in Rule 506 offerings!
The Investor Advisory Committee's recommendations on implementation of the lifting of the ban on general solicitation, as mandated by Section 201 of the JOBS Act, include these:
- "Require all issuers intending to rely on the new JOBS Act general solicitation exemption to file with the Commission either a new 'Form GS' or a revised version of Form D. Filing the form should be a precondition for claiming the exemption."
- "Require that all solicitation material prepared or disseminated by or on behalf of the issuer that is being disseminated to the public through a general solicitation or advertising campaign in reliance on the new exemption be furnished to the Commission."
- "The Commission should amend the natural persons prong of the definition of accredited investor to better reflect a population that has the financial sophistication to analyze the risks in private offerings and/or the wealth to withstand potential losses. The Committee believes this is essential in the absence of the procedural protections afforded by the general solicitation and advertising ban."
We'll take these tone-deaf recommendations up in more detail in a subsequent post or two. It's enough for today to digest this fact of life, that the startup and emerging company ecosystem has an adversary in the Dodd-Frank Investor Advisory Committee.
Photo: EMSL / Flickr.