Will the Last Startup Leaving Dodd's America Please Turn Off the Lights?

http://www.bigstartups.com/wac6/blog/1273/Will-the-Last-Startup-Leaving-Dodds-America

by bigstartups • 16 years ago

34 36 16 years ago

hristov5• 16 years ago

This is really silly. First of all, I would recommend that if there is a short blog post that does nothing more but summarise an article, one should submit the article and not the blog post.

Second, the actual businessweek article is so silly it is laughable. It mentions that Dodd wants to connect the accredited investor metrics to inflation but admits that it does not know how that will happen. Then it makes a silly guess out of the blue how it may happen and and assumes that is how it will happen and then goes on to complain how it will be the end of the world. This is a classic straw man argument.

Here's the thing - politicians do not like to make drastic changes unless they are warranted. I guarantee you Dodd is not going to double the income and net worth requirements for accredited investors overnight. The requirements will probably be connected to inflation starting now, which means they will keep their current values when the law passes and will slowly increase with inflation in the future.

bballant• 16 years ago

I'm with you. The article takes a tiny piece of the much larger financial reform regulation package which has been a bipartisan effort with Republican Richard Shelby very much involved, amplifies it through some hypothetical number crunching, and then attributes it all to Dodd.

The blog post then takes it a step further by adding a layer of incendiary drama. Might cause one to forget the whole point of financial reform which is to prevent the sort of economic crisis we just went through from happening again--a crisis that has surely done more damage to startups than the proposed legislation could ever do.

cjoh• 16 years ago

What's frustrating is-- this is an opinion piece (the guy's a professor, not a writer), and this opinion piece has no NONE, zip nada, link to the actual bill that Dodd is proposing. It's all just conjecture.

Drives me nuts that the media doesn't link to pieces of legislation when it's all online (and we at Sunlight work so hard to get it there).

grellas3• 16 years ago

I would not be too sanguine about what politicians beholden to the trial lawyers might or might not do in this sort of area. When you shrink the pool of accredited investors, you remove many of the avenues by which startups can raise capital in a manner by which they can be assured they are not violating securities laws. If the safe avenues are no longer there, the risks of lawsuits increase dramatically. It will all be done in the name of protecting investor rights, but the real beneficiaries here will be the trial lawyers and the losers will indeed be all early-stage companies that seek to raise capital.

Maybe it will happen quickly or maybe it will be gradual but the underlying motives here are pretty clear and have nothing to do with promoting the health of startups.

I express no opinion about the quality of the article posted here but it is a mistake to assume this legislation is benign for startups. It is not.

hristov5• 16 years ago

Really? That is a bit far-fetched to say the least. And don't you think one should actually check out what the inflation adjustment is going to be before crying foul? If it is the version that I suggested is most likely, I don't think it will have much of an effect at all.

anigbrowl10• 16 years ago

George, I am disappointed by the superficial assumptions which you make here, which I feel serve to obscure rather than clarify the issue.

(Before going on, grellas is a lawyer and one I respect due to his extensive experience, while I am not only not a lawyer, I have no qualifications of any kind on such matters and the following is nothing but my personal opinion. If you need guidance in this area then you should be consulting someone qualified to practice securities law instead of wasting your valuable time reading my upstart ideas.)

First, the relevant material we're talking about. The text of the bill is to be found here: http://banking.senate.gov/public/_files/ChairmansMark31510AY...

The relevant sections are #412 and #413, as follows:

SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD FOR INFLATION.

The Commission shall, by rule— (1) increase the financial threshold for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, by calculating an amount that is greater than the amount in effect on the date of enactment of this Act of $200,000 income for a natural person (or $300,000 for a couple) and $1,000,000 in assets, as the Commission determines is appropriate and in the public interest, in light of price inflation since those figures were determined; and (2) adjust that threshold not less frequently than once every 5 years, to reflect the percentage increase in the cost of living.

SEC. 413. GAO STUDY AND REPORT ON ACCREDITED INVESTORS. The Comptroller General of the United States shall conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act.

'Commission' here refers to the Securities and Exchange Commission. Accreditation criteria as they currently stand are set out in rule 501 of Regulation D of the SEC's rules, under the authority of the Securities Act 1933. You can read those criteria here: http://www.law.uc.edu/CCL/33ActRls/rule501.html

Now, to my argument.

First of all, the proposed bill lets the SEC itself recalculate the financial threshold for a natural person to be an accredited investor. As I am sure you are aware, the SEC proposed raising that threshold to $2.5 million in investment assets back in December 2006 (primarily as a prophylactic against fraud by hedge fund managers) but abandoned the idea following the feedback they received during the public consultation period. I fail to see how requiring the accreditation threshold to keep pace with inflation and tasking the GAO with a review of current practices - to which both attorneys and entrepreneurs will presumably contribute - is a bad thing.

Perhaps your specific objection is to the suggestion that the SEC consider CPI in its reassessment of thresholds from the limits established in 1982. I would respond that pointing out that requiring consideration of the changes in CPI is very different from mandating their use as a metric, and only uses inflation as a rationale for future long-term maintenance of threshold amounts.

Incidentally, even if such thresholds were imposed by fiat tomorrow, are we really to believe that the risk of any given to investors is only 43% of that which it was in 1982? Is it logical to maintain a fixed dollar amount as the threshold for individual participation in offerings? Surely a period of inflation which further eroded the real value of that threshold would not in any way improve investors' collective security. I cannot fathom that investment risk declines in direct proportion to the purchasing power of the currency.

In any case, Regulation D also provides that becoming a director, partner, or executive offer in a business venture confers accreditation status, as does certification of an entity as a business development company in accordance with the Investment Company Act of 1940. So as a purely practical matter, someone of middling means who might not qualify as an accredited investor under future revisions of the income or asset thresholds could still invest in a startup by the fairly simple expedient of joining the startup in one of the capacities mentioned above.

Your allusions to predatory trial lawyers and obscure motives trouble me; rather than discussing the likely outcome of changes in the law (but rather assuming the shrinkage of the investor pool as a fact), you engage in a kind of ad-hominem by proxy, casting aspersions on the proponents of change without addressing the substantive issues in their proposal.

I know you are not giving legal or political advice here, just expressing a brief reaction to these proposals. I do not think you are a conspiracy theorist or someone who seeks to mislead, and that your concerns on behalf of current and future clients are real. Nor am I a proponent of reform at all costs, or oblivious to the potential headaches for those seeking to raise capital - as an independent filmmaker of extremely modest means, these proposals could affect my ability to raise capital too. But I fundamentally disagree with your suggestion that this bill represents a covert attempt to enrich trial lawyers at the expense of honest entrepreneurs.

jbooth• 16 years ago

Money quote: <i>Currently, a person must have a net worth of $1 million or an annual income of $200,000 if single or $300,000 if married (and filing jointly) to be an accredited investor. The senator's proposed bill doesn't say what inflation adjustment will be used to convert these numbers, established in 1982, to today's dollars. But if we use the Bureau of Labor Statistics inflation calculator to adjust these figures on the basis of the consumer price index, then the annual income requirements for accredited investor status would become $449,000 if the investor were single and $674,000 if the investor were married, while the net worth requirement would become $2.25 million.</i>

So, in other words, the bill's not even finished being drafted and they made some noise about maybe adjusting some figures, but they have CPMs to sell so they'll just assume "adjust" means "multiply by 2.25" and get the snappy headline.

That said, Dodd clearly shouldn't do anything to hurt actual startup investment.

nfnaaron• 16 years ago

- What problem does Dodd say this is going to solve? Is he trying to reduce the workload of the SEC?

- Whatever the problem is, is it a problem?

- Does this solve it?

- Who is paying/lobbying Dodd to do this? I imagine it wasn't on his radar until someone who stands to gain brought it to his attention. Is it just Tourette legislation?

- If the result will be as bad as the article says ... how/why do we let Congress get away with fucking things up?

anigbrowl10• 16 years ago

It would increase the workload of the SEC, though only very marginally. The SEC proposed (but then retracted) a very similar change about 3 years ago. You can read about it here: http://www.sec.gov/rules/proposed/2006/33-8766.pdf their rationale is set out on pages 17-18.

tl;dr the SEC was worried that the explosion in house prices during the 90s (which raised many people's net worth above the accreditation threshold set in 1982) and the parallel increase in both the popularity and complexity of private investment offerings were tempting many people out of their financial depth. Large numbers of people borrowing against the value of their home to invest in hot deals without much understanding of the risks involved struck the SEC as a dangerous situation.

Arguably, the events of the last few years proved them correct. The SEC was not trying to strangle startups (nor was it blind to the the possibility of such a result), but to maintain a barrier between overconfident homeowners and glib fund managers whose only business case was that markets tend to rise over time.

waterlesscloud• 16 years ago

Good thing the highly trained professionals on wall street weren't out of their financial depth, eh?

jsz02• 16 years ago

I don't know enough about the legislation to comment on it specifically but I do know politics -- it appears the Republicans are pulling another HCR strategy here and simply letting the Democrats go forward on this unchallenged on substance in an attempt to score a political Waterloo 2 (since the first one didn't quite work) Pretty sad state of affairs I think. I'm willing to accept Dodd's bill isn't great (or even good) but the response of trying to make it purely a political issue with dishonest speculation of repealing it later is pure lunacy from the opposition. People are desperate to see some major financial reform so it will be extremely popular no matter what's actually in the bill. The political narrative of saying "the people who caused the meltdown oppose the fix" is political gold. As a committed liberal I'm actually a bit worried that the classic check & balance of right/left is getting out of whack due to the massive failure of the Republican party to put governing over politics. They need to come to the table with honest intentions and substance and try to be part of the solution.

anamax3• 16 years ago

> They need to come to the table with honest intentions and substance and try to be part of the solution.

If Democrats left to their own devices do dumb things, why should we want to let them stay in power?

What's wrong with holding Democrats responsible for their proposals?

anigbrowl10• 16 years ago

When elected members of a political party find themselves in opposition, they are not paid to just sit on their hands and say 'fuck it'. They still have an obligation to their constituents to participate in the legislative process even if they don't expect to succeed. That's why we have a legislative branch instead of just an executive.

jsz02• 16 years ago

Nothing wrong with holding them responsible or voting them out if that's what the people decide. I just believe if you get elected to govern it's really irresponsible to spend your time running for re-election the whole time. If they don't stop focusing exclusively on making everything "his Waterloo!" the American people won't trust them to govern. I don't want to see a one party system but it seems like we're heading in that direction due to their political miscalculations. Even the hype now around November is pretty unrealistic. There just aren't really enough weak Democrats up for re-election in the Senate to "repeal it!" so they're setting themselves up for a big political failure 8 months before an election they might actually do well in otherwise.

jackowayed• 16 years ago

Why do investors need to be accredited at all? If I, someone with savings and income far below those thresholds, want to invest a large portion of my net worth into a startup I really believe in, why should the government stop me? It's so risky that it's a horrible idea, but don't I have a right to be stupid?

hristov5• 16 years ago

Because of scams. Of course you are going to say that you should have the right to fall for scams if you want to, but some scams become so prevalent they actually have an effect on the economy, or can crash the stockmarket.

I also have to say that the accredited investor rules do not exactly prohibit you from investing in startups. Or from owning stock. They are part of a complex securities regulation framework and it is difficult to explain in a quick message board post exactly where they fit in.

gojomo3• 16 years ago

But the result of the rule is that submillionaires can't invest in YC-like companies, but they can still lose all their money (and whatever additional amount banks will loan them) on...

- day-trading

- real-estate-speculation

- investing in 'safe' public stocks like Enron, Fannie Mae, Lehman, and GM

- trading forex following rules they learned from late-night-informercials

- gambling in licensed casinos offering rigged games

- buying state lottery tickets

All these often-negative-expectation activities are allowed. So what, exactly, do the 'accredited investor' limits prevent a gullible person from doing? A fool will be parted from his money; these rules just change the form of the transactions that will be used.

Meanwhile, the limits prevent wise-but-poor people from being shareholders in small businesses that they actually have some expertise about, and which are more likely to be positive-expectation than the above activities.

anigbrowl10• 16 years ago

It reduces the burden on entrepreneurs by freeing them from the complex and expensive filing requirements of the SEC for making a public offering similar to an IPO. Basically the accredited investor can say 'I am sufficiently wealthy and well-informed that if I lose all my money I will not run to the authorities crying that you encouraged me to take financial risks that were beyond my ability to understand'.

If you wish to solicit funds from the general public for a profit-seeking enterprise, you have to include a huge number of disclaimers and warnings with your offering and pay a very expensive securities lawyer to evaluate and sign off on your compliance with SEC regulations, or you face a very high likelihood of getting prosecuted for mail fraud and multiple other offences.

You may be a smart individual or an ethical entrepreneur, but the empirical evidence is that the general public is rather naive, poorly informed about risk assessment and financial engineering, and there are a lot of people out there eager to exploit this fact.

It would be nice if we could do without police and fire departments and pay less tax as a result, but crime and outbreaks of fire are annoying realities whose costs typically exceed those of professional emergency responders.

gills• 16 years ago

Step 1. Make private investment difficult and costly. Step 2. Save the day with gov small business investment. 3. Pick winners based on political agenda.

There's more than one way to build a command economy...

Will the Last Startup Leaving Dodd's America Please Turn Off the Lights?

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