Senator Dodd's Banking bill-gets even worse!

• Posted by Jeff Carter
• on March 29th, 2010

We previously commented on Senator Dodd’s banking bill here. As the bill gets read by staffers, more tidbits come out. It always seems to me that when congressman of both parties write a bill, they include things in that bill that are outside the scope of the bill. Plus, there are unintended consequences of every piece of legislation. These consequences usually add up to higher costs for everyone. For example, Sarbanes-Oxley has killed the IPO market in the US. This hurts investors that are looking for a public offering to monetize their investment in companies. (Less than .05% of all companies do an IPO, but SOX decreases that probability.)

Buried in the Dodd bill are restrictions on VC and angel investing! I thought this was a banking bill. There isn’t one instance in the entire melt down that VC investment, or angels investing in start up business contributed to the melt down. If anything, they were hurt even worse than any other sector. Capital accounts were drained, or frozen. VC’s couldn’t raise new money. Angels were sitting on, rather than committing capital.

At www.avc.com, they found that Dodd is changing the definition of an accredited investor. Currently, you have to have over 1M in assets, and/or a net income of $250,000. Going forward, the new definition will be assets of 2.3M and/or a net income of over $450,000. This severely shrinks the pool of people that would legally be able to invest in start up companies. They also index these amounts to inflation. What happens when we have an inflation rate of 5% or more, and assets are not appreciating by the same amount?

Secondly, Dodd eliminates the existing federal pre-emption over state regulation of “accredited offerings.” Angel and venture financings could be regulated state by state creating a fairly burdensome set of rules and regulations that each financing would need to be subject to. Currently there is a federal pre-emption that makes getting these kinds of deals done fairly easy.

This invites all kinds of new rules and regulations from states. It also fails to recognize if states will be able to limit their angels. Suppose I live in Indiana, and want to invest in an Illinois company. Indiana could prohibit that investment. There is potential for states to regulate investments with requirements and new regulations. These provisions are a job killer, and a business killer. They inhibit entrepreneurs from getting capital to start new businesses.

A friend of mine said the Angel Capital Association is working on this-but why do they have to work on it at all? The bill is supposed to be about banking-and banking has nothing to do with angel investing or venture capital investing!

Thought this Congress was supposed to be about jobs, jobs, jobs. Looks like to me they are about taxes, taxes, taxes, regulation, and spending, spending, spending. Hope Dodd enjoys his retirement at his Irish cottage.

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