13 posts categorized "Startup America"


My friend and fellow lawyer Joe Wallin thinks a lot about how laws passed by Congress - often including laws that have good purposes in the appropriate arenas - end up having adverse effects on startups.

I know this about Joe for almost as long as I've known him. In fact, we often collaborate on projects to identify threats to startups and startup investing, such as the Save Reg D campaign.


Even so, I was blown away by an email he sent last week on which I was copied, in which he laid out, bullet by bullet, what amounts to a truly pro-startup federal policy agenda. With Joe's permission, I'm posting his email below and at startuppolicy.org.

Joe Wallin's Ideas:

• Make Section 1202 permanent. Right now, it expires at the end of this year.
• Repeal Section 409A as it applies to startups. Watch this video. See also this quora post.
• Make the 60 day window on 1045 longer. 60 days is too short in startup land to find a replacement investment.
• Shorten the 5 year holding period under 1202 to 2 years.
• Repeal the bad actor provisions in the Dodd-Frank Bill. These provisions are a form of extreme overkill. They are going to make it a lot harder for startups to startup and grow.
• Repeal the increase the accredited investor threshold in the Dodd-Frank bill. Why make it harder to invest in startups?
• Repeal the second sentence of section 201(a) of the JOBS Act:
(a) Modification of Rules-

(1) Not later than 90 days after the date of the enactment of this Act, the Securities and Exchange Commission shall revise its rules issued in section 230.506 of title 17, Code of Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) of such title shall not apply to offers and sales of securities made pursuant to section 230.506, provided that all purchasers of the securities are accredited investors. Such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission. Section 230.506 of title 17, Code of Federal Regulations, as revised pursuant to this section, shall continue to be treated as a regulation issued under section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)).
This second sentence is what has hung up the SEC. Why require SEC regulations at all. Repeal the current regulatory barriers directly!

Also, the crowdfunding bill ought to be amended. Bill and I have sets of amendments that are places to start.

Also see this on quora.com.

It's possible startuppolicy.org will be a place where Joe might further iterate his list, or where others might add or develop policy ideas.

Photo: "Petition of Ohioans to the Senate and House of Representatives Regarding Land Sale Policy, 01/10/1810," The U.S. National Archives / Flickr.

Joe Wallin's holiday legislative wish list

Joe Wallin just put up a fun but serious wish list on his blog.

He lists what he regards as the top four reforms Congress should take up in 2013 that would benefit startups in America.

Wish listHe puts equity crowdfunding for nonaccredited investors and lifting of the ban on general solicitation at the top. Clearly, his focus is on reducing the friction entrepreneurs encounter when raising financing.

I'd put his number four item, immigration reform, at number two. And I might be inclined to leave capital gains tax benefits off the list entirely, at least this year.

But it's a great list, and Joe is someone to listen to. He thinks through lists like this much more deeply than most of us do.

Screenshot: Jeff Van Campen / Flickr.

Gotham, Delaware

Some weeks back, the New York Times ran a half-hearted (half-baked) exposé of international criminals and domestic tax cheats who form business entities in the state of Delaware.

The broad implication was that Delaware makes it too easy to form a corporation. As though the Delaware Secretary of State were a DMV handing out licenses to new drivers without requiring a road test. Or an agency issuing a permit to carry a concealed weapon without doing a background check.

GothamkrakowI read the piece wide-eyed.

As a start up and emerging company lawyer, I appreciate the rare efficiency represented by how easy Delaware makes it to form a new corporation or LLC. It's fast, it's fairly priced, and it's one small but important expediter of launched ventures and consummated deals.

The reporter, Leslie Wayne, connected the wrong dots.

Broadly speaking, a corporation is a legal fiction, the essential purpose of which is to spur economic activity by shielding entrepreneurs and investors from many of the costs of the business (shift some "externalities," if I'm remembering the law-and-economics school vocabulary, to society at large). Delaware gets it right by understanding that there is no moral or ethical or criminal gatekeeper function to be performed at the time an entity is formed.

The dots to connect are the criminal actions with the criminal actors.

Photo: Maciej Zygmunt / Flickr.

JOBS Act G+ Hangout - TODAY

UPDATE 11:21 am Pacific : We are live now. Join us at https://t.co/uvmnaDjx.

Today's the day Joe Wallin, Denise Howell, Doug Cornelius and I plan to hangout on Google+ to talk about the JOBS Act and its implications for startups and emerging companies. We plan to start at 11 am Pacific.

GplusJOBSActHangoutPromoShotYesterday, Joe Wallin and I experimented with the "hangout with extras" version of G+ hangouts, and it seemed to work fine. But I couldn't figure out how to reserve a url to be able to post ahead of time as a signpost to the event. So I guess we'll hop on a bit before 11 am Pacific, establish the url, and tweet and post it then.

A few background points about the JOBS Act.

"JOBS" in the title of the Act stands for "Jumpstart Our Business Startups." The President signed it earlier this month, and it is now law.

President Obama Signing the #JOBSAct in the Rose Garden April 5 2012

But not all provisions of the JOBS Act are in effect. Some are; some became effective when the President signed the bill. Others changes will require rulemaking from the SEC before they are implemented.

The JOBS Act means different things to different people, largely dependent on how they self-identify within the startup/emerging company ecosystem. I'm sure we'll talk about that today. We'll also talk about whether some of the pieces of the JOBS Act are overblown.

On the About page of this blog, near the top, there is a "quick reference" overview of the JOBS Act, with links, internal and external, to further reading and some resources.

Drop in later today if you can!

Pick a crowdfunding exemption. Any crowdfunding exemption?

The AP reports that President Obama will endorse or propose a package of pro-startup legislation. Today.

The package will draw upon, among other elements, the Startup Act and the American Growth, Recovery, Empowerment and Entrepreneurship (AGREE) Act. Those Senate bills are grab bags of tax incentives, regulatory reforms, and new visas for immigrant entrepreneurs. (The Startup Act would make permanent a 100% exclusion on captial gains from qualified small business stock held for at least five years; it's a great idea, though query how the President is going to square it with electioneering against Mitt Romney's tax bracket.)

Screen shot 2012-01-31 at 7.19.24 AMIt will be interesting to see how granular the White House will get, when it comes to a crowdfunding exemption.

There are at least three crowdfunding exemptions to choose from. Four, if you include a proposal that state securities regulators may be conducting a two-minute drill to pull together.

The Congressional bills are H.R. 2930, S. 1791, and S. 1970.

In many respects, H.R. 2930 (hereinafter, the "McHenry bill"), passed by the House with unseemly unanimity, is the best and most obvious choice. Back in November, the President lent timely support to the McHenry bill with this statement.

S. 1791, introduced by Senator Scott Brown, is also viable. This is the bill being supported by the Wefunders petition (which came to my attention because it drove a ton of traffic to my site yesterday). Wefunders appears to be in the business of being a platform, so it may make sense that they support the Brown bill, which requires use of an intermediary.

S. 1970, introduced by Senator Merkley, is the crowdfunding bill that represents no crowdfunding exemption at all.

The optimum crowdfunding exemption may be a mix of the McHenry bill and the Brown bill. I like what Paul Spinrad said in a responsive comment under his own post on BoingBoing last night:

"I think H.R.2930 is right to not require an intermediary-- that's important, a small local non-tech savvy business shouldn't have to go online.  But I like the lower individual investment cap of $1000 better in S.1791 -- I think $10K / 10% of income (H.R.2930) is way too high to start this new legislation out with."

I'll have to do some more thinking before I give up on the idea that a platform is the best way to bring accountability to the issuers, but I hadn't before appreciated the point that some businesses may not know how to deal with the internet.

Note as I'm just about to hit "publish" at 7:02 AM Pacific: Check out this post by Instagram co-founder Mike Krieger on the White House blog. Among other things, Krieger talks about progress toward making it easier for immigrant entrepreneurs to establish themselves in the US.

Update 10:44 AM Pacific: The White House has issued a press release, stating that "The President is calling for a national framework that allows entrepreneurs and small businesses to raise capital through 'crowdfunding.'”

Five Concrete Ideas to Reduce Federal Barriers for Entrepreneurs

Startup America looks to be primarily a private sector initiative. We attendees at the Angel Capital Association 2011 Summit in Boston are looking forward to hearing Scott Case, CEO of the Startup America Partnership, speak on this tomorrow morning.

But there is a government role in the Startup America initiative, as well.

One goal stated by the White House at the launch of Startup America two months ago was that it should "identify and remove unnecessary barriers to high-growth startups." That question appears to have since been reformulated on an SBA sponsored site to read, "What concrete ideas could reduce federal barriers for entrepreneurs trying to start and scale companies?"

Many creative ideas have been proposed, some for new programs and many for tax incentives. These ideas have merits and drawbacks, and some of the more creative will no doubt on a different day be discussed on this blog.

800px-Construction_Worker_moving_concrete_barrier_DSC_0474But today I mean to be boring and literal. Let's take that concern initially stated by the White House at face value. Let's put creative proposal for new programs and new tax breaks to one side, and simply answer the question asked.

There are existing federal statutes and regulations, on the books today, which, regardless of intent or merit as applied to larger corporate activity, make no sense in Startupland.

Here is a list of five concrete ideas to reduce federal barriers for entrepreneurs trying to start and scale companies:

  • Repeal the prohibition on general solicitation under the Reg D exemption. Private financing is taking place digitally and yet we still labor under an analog rule built for a time when to broadcast (via radio, TV or newspaper) could fairly be said to equate with public solicitation. Communication now is more about efficiencies in finding the right audiences for the particular information. Reg D works because of the accredited investor definition. That definition is fixed for the near term, and we should rely on it. As long as a financing is limited to accredited investors, it should not matter whether the angel or VC first heard about the company through AngelList, a tweet, a pitch forum, or in any other manner, in order for the financing to remain exempt under Reg D.
  • Fix the rollover period under Section 1045 of the Internal Revenue Code so that it's useful. This is an idea Tom Alberg brought up at the Nortwest Regional Meeting of the Angel Capital Association two months ago. Section 1045 could be to startup investing what Section 1031 ("like-kind exchanges") is to real estate. The impact of Section 1045 could be very powerful, especially now with the Section 1202 100% exclusion of capital gains tax for QSB stock held for 5 years. The problem is, though, that Section 1045 requires that proceeds be reinvested within 60 days. If the rollover period were more realistic, angels would have more opportunity to keep their startup investment capital in play.
  • Remove caps on H-1B visas. Note, this point is different from the Startup Visa movement, which is probably a very good idea but which represents a new initiative or an extension of existing law. The purpose of this list is to identify existing barriers.
  • Repeal 409A as it applies to fair market value stock option pricing for startups. Although big banks and multinational corporations may concoct clever schemes for deferring executive compensation, in a never ending game of deferring or avoiding taxes, startups don't price and issue stock options for such nefarious purposes. And yet they are caught in a complicated regulatory scheme designed for the next Enron. It really doesn't make sense for either the bootstrapped startup or the venture-backed pre-revenue company to be paying anywhere from $6,000 to $12,000 to have a 409A valuation done.
  • Reverse the presumption about 83(b) elections. Startup co-founders will often (should!) want to subject their shares to vesting requirements. To avoid being taxed incrementally on the value of their stock as restrictions lapse over time, they have to file 83(b) elections within 30 days of the issuance of their stock. There is no forgiveness for missing the filing. And as "old hat" and boilerplate as the process may be for lawyers and finance professionals, it can be a trap for new entrepreneurs and confusing even for those who have made 83(b) elections before. As Joe Wallin has blogged, this problem could be solved by reversing the presumption: as long as you pay fair value for your founders' shares, presume you've made an 83(b) election to take the tax impact now, rather than over x years, unless you make an affirmative filing to the contrary.

Some of the ideas above, and others, can be found at a sliver of a wiki on the topic on Quora. We may want to work to get these ideas, and others, posted on the SBA "barrier" clearinghouse.

Photo: Construction worker moving a concrete barrier, by Ben Aveling.

Okay, We're Going There: IP Laws as Barriers to Startup America

A post Friday by Pamela Jones on Groklaw has suddenly blown open the agenda for the White House's question about barriers for high-growth startups.

Jones says IP laws are the biggest barriers, and she makes an impassioned case for why this is so. George Grellas's comment to the piece on Hacker News, and the comments in turn elicited, are also rich reading.

What I expecially like about Joe Wallin's barrier-removing agenda is that it's at once radical and technically comprehensible. You could draft a single bill in Congress to accomplish all of it, presumably in the current Congress.

Jones's Groklaw critique is more fundamental, as the roots of IP law go deeper than statutes and regulations. In addition to the societal and cultural debate that would be required, significant reform of IP law would also require a political debate that may not be possible with a legislative system that is so throughly bought and owned by bankers and other corporate interests.

But I think Jones is right to up the ante. IP may also be the singular issue - others might be the lack of socialized healthcare, and the need for immigration reform - that could drive actual entrepreneurs to participate in the policy side of the Startup America discussion. Financiers, lawyers and accountants are arguably the provenance of the agenda items proposed so far.

What seems to have occassioned Jones's post was a White House video from David Plouff, which did not mention Startup America by name, and which does not show the comments submitted. The relevant page says comments are now closed. I realize it's early, and doubt there is single, consensus third party forum out there to collect and prioritize the potential crowdsourcing, but it would be good to find at least a metaphorical "same page" that is open, permanent and iterative. Meantime, I'll make a brief comment on the Quora thread with a link to Jones's post and Grellas's comment.

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