If it ain't broke, don't fix it

Incredibly, there are interest groups in the US who are taking advantage of a provision in Dodd-Frank to try to throttle angel investing.

CaptureFor context, see this excellent press release put out today by the Angel Capital Association.

Here's the money quote:

“'We appreciate the importance of regulation to protect investors from fraud, however regulations need to be focused in areas with a proven need for added oversight.  The angel investment asset class has experienced very little fraud, because angel investors have strong processes for due diligence and investment terms, and ongoing entrepreneurial support,' said Marianne Hudson, ACA’s executive director."

As the SEC revisits the accredited investor definition, there should also be opportunity to bring some non-financial criteria to the definition, hopefully as alternatives to the income and net worth thresholds. But the financial criteria have, in effect, over time, been permitting more and more citizens to qualify as accredited. This is democractic and investor protection has not suffered. Arguably, investor protection has improved because of the expansion of angel investing.

Photo: "Banksy Bullet Proof Angel in Great Eastern Street London," Cyberslayer / Flickr.

David Rose's new book on angel investing

Just got David Rose's new book in the mail, on angel investing.

Definitely looks like it's worth checking out.

Those of us who hang out a fair bit on blogs and online will be familiar with many of David's precepts, from his long, detailed and popular answers on the topic on Quora.

But this book looks like a great way to organize his philosophy on angel investing in one place.

The angel lawyer in me is first drawn - naturally - to a deal form bank at the back, where there is what looks like a term sheet for a light preferred stock offering that combines the NVCA model forms with Ted Wang's Series Seed.

But, bigger picture, the book should be valuable for insights into David's practices as an angel. Chapter titles include "why everyone with six figures to invest should consider angel investing" and"why every angel needs to invest in at least 20 companies."

The first time I encountered how opinionated and direct David could be was when serving on a panel with him at a talk at an accelerator in DUMBO a couple years ago. The topic was crowdfunding, and David was confident that the right structure for non-accredited crowdfunding deals was revenue loans.

And sure enough, there is a revenue loan term sheet in this book! (But I'm swinging back again to being a lawyer.)

David Rose's new book on angel investing

Title III Do-Over

It is an absolutely glorious, summerlike morning in Seattle.

I'm walking to work, listening to a webcast of a hearing of the House Financial Services Committee, which is considering draft legislation to fix things not working with the JOBS Act (both the text of the original legislation, and the implementation of it).

6a01156e3d83cb970c01a3fcfe88cc970b-580wiIt's very gratifying to hear Representative Patrick McHenry openly admit that Title III was a failure from the get-go, and that the fault lies with Congress, not the SEC's prospective implementation. (Title II and the rulemaking surrounding new Form D filing requirements is a different story.)

Gratifying, but not surprising. Rep. McHenry made similar statements at the ACA Summit in Washington DC in March of this year.

State securities administrators are going to be heard on the non-accredited crowdfunding issue. Bill Beatty, the state securities administrator for Washington State, should be speaking at this hearing shortly.

With respect all sides, I think my Individual Crowdfunding Account concept may be part of a holistic, national solution.

When I get to a desktop, I will add links to relevant prior posts on that topic, just below.

Update; links on McHenry Do-Over / Individual Crowdfunding Accounts:

A Simple Act of Congress to Make Things Better for Startups

My friend Joe Wallin had an idea earlier today, which was, “how can Congress pass a single, simple law, to tell federal agencies to back off the rulemaking?”

His idea is borne of the frustration we all feel when Congress passes a reform intended to make life easier for startups, entrepreneurs, and the angel investors and VCs who support them, only to see that new law languish – or, worse yet, backfire – through rulemaking to implement the Congressional reform.

Here’s a simple bill we’ve come up with. With respect, we believe this bill, by itself, might help curtail the problem we’ve seen with rulemaking under the JOBS Act.

“In implementing any Act of Congress through rulemaking, or in construing the meaning of any Act of Congress through ruling or interpretation, the various administrative bureaus and agencies of the United States shall not make it harder or more difficult for entrepreneurs or emerging companies to raise money privately from accredited investors, and may expand, but shall not diminish, the pool of persons who qualify as accredited investors.”

What do you think? If it were to pass, and you were a clever person in a federal agency bent on drafting rules to frustrate this Act of Congress, how would you undermine it? 

Another Car2Go story

I love this service.

A lot of people in Seattle are talking about the politics of ride sharing services.

But Car2Go is more like a self-service. Or the loan of hardware, I guess you could say. Because you find a car, passkey yourself in, and drive yourself to where you want to go.

Latest episode of ad hoc transportation delight: I left my downtown office midmorning yesterday, running for my car to make a meeting with a client in Fremont. When I got to the garage, I found I didn't have my keys on me. I started to trudge back to the office, thinking of the alternatives: be a half hour late; call instead of meet in person.

Then I thought of checking on whether a Car2Go buggy might be near. Checking the app, I found one a block away.

I was only 10 minutes late!

Got home the same way, via Car2Go parked outside the building I'd just visited.

Midweek Report

Non-accredited crowdfunding: a license to pillage the vulnerable, or democracy in action?

Monday, a friend sent me a link to a weekend New York Times editorial which strongly condemned the SEC's proposed rules under Title III of the JOBS Act.

However, unlike the criticism coming from those in the nascent non-accredited crowdfunding industry, the NYT editorial board faults the SEC's proposed rules, not for being unworkable, but for not being restrictive enough.

BjvXNWuIgAASow1I'll leave aside the Times' misconception that the faults lie in the agency's rulemaking rather than the legislation itself. In this regard, the editorial board makes the same mistake that non-accredited crowdfunding advocates, coming from the other direction, make. (Interestingly enough, at the ACA Summit last week in Washington DC, Rep. Patrick McHenry, the father of the original federal non-accredited crowdfunding bill, stated that Title III needed to be fixed legislatively, by Congress, not by rulemaking at the SEC.)

I'll also leave aside other aspects of the legislation and proposed rules which the NYT editorial board gets wrong.

Instead, I want to identify certain presumptions implicit in the NYT critique, for purposes of comparing and contrasting those presumptions with those underlying the critique of the very same proposed rules by non-accredited crowdfunding advocates:

Here are what I infer to be the NYT editorial board's presumptions:

  • People of modest means or on fixed incomes will be scammed out of money they can ill-afford to lose.
  • Even if a crowdfunded company turns out to be promising, later, more sophisticated investors will cheat the earliest investors out of fair returns.
  • Reliance on participant representations and self-policing is a recipe for fraud.

Non-accredited crowdfunding advocates approach the subject from a variety of different subcultures, you might say: some our tech start up oriented; others are community activists; others have a small business orientation. But these advocates share at least one or more of the following presumptions:

  • Startup and private company funding should be democratized in some meaningful way, and not remain the private preserve of the 1%.
  • Friends and family should not be shut out of legally investing in the business of a nephew, or a child, or an aunt, or a colleague.
  • More local dollars should circulate through local communities. Neighbors should be able to own a piece of the local restaurants, craft breweries, and other brick-and-mortar small businesses they support with their day-to-day commerce.
  • People are motivated to crowdfund for reasons other than Wall Street-like fixation on financial return.

So, which set of presumptions are correct?

Both sets are correct.

And herein lies the problem with non-accredited crowdfunding under Title III of the JOBS Act: it does not pick a consistent worldview, but instead hedges each feature of the exemption as though the fears of each camp are certain to be realized.

I happen to agree with the New York Times editorial board. For purposes of a federal law which preempts state law, crowdfunding should be limited to accredited investors. Accredited crowdfunding is supported by Title II of the JOBS Act, and the changes to Rule 506 that have been implemented by SEC regulation under Title II. There are transition headaches here, to be sure, but so far these accredited crowdfunding reforms are enabling (some would say, ratifying) significant changes in how angel deals are syndicated.

And I happen to agree with the aims of most of the non-accredited crowdfunding adovcates, though I believe Title III to be a lost cause, not worth fighting anyway because the proper place for non-accredited crowdfunding exemptions is at the state level, where rules can be scoped with local conditions in mind.

Photo: Rep. Patrick McHenry addressing the 2014 Angel Capital Association Summit last week.

Cherry blossoms

The Angel Capital Association 2014 Summit took me to Washington DC at the end of last week. I stayed over Saturday, mostly to take the opportunity to see Eddie Johnson play for the DC United football club at RFK Stadium, but also in the hope of seeing cherry blossoms at the Tidle Basin.

The cherry trees in DC were not in bloom.

But they are in full bloom back in my neighborhood in Seattle.

Cherry blossoms