The 1300 page financial reform bill making its way through congress has the potential to be one of the biggest blows to US entrepreneurship ever.Â It makes finding investors much harder by requiring startups to register with the SEC and wait for 120 days for approval before the startup can accept money.Â It also lowers the pool of accredited investors by raising the requirements from $1 million in assets or $250k in income to $2.3m in assets or $450k in income.Â Forrest Woolworth of Capital Entrepreneurs member PerBlue wrote a great blog post laying out the case against this bill:
According to the US Census Bureau and the Kauffman Foundation, start-ups and businesses less than five years old created all of the net new jobs over the last 25 years. Over that time, angel investors were responsible for up to 90 percent of the funding these businesses received. This angel funding allowed these firms to grow and create jobs. In 2008, angels invested $19.2 billion in over 55,000 companies.
Now what exactly are angel investors? These are high net worth individuals who invest their own money in start-ups and small businesses. Angels provide the necessary investments many small businesses need. These are not investments in trading risky derivatives (which do not provide a value add to anything), but rather they contribute directly to innovation and job growth. By the current definition, an accredited angel investor must have a net worth of at least $1 million. The RAFSA2010 bill would raise the net worth requirement to $2.3 million. This would eliminate at least 2/3 of all current angel investors.
In addition to greatly shrinking the number of angel investors, the RAFSA2010 bill would make it more difficult for the remaining angel investors to invest by introducing new regulations and barriers. These barriers will complicate and delay investments by requiring a 120 day waiting period for investments to potentially be reviewed by the Securities and Exchange Commission, as well as make it difficult to raise money from angels in different states.
This will greatly hamper the creation of new businesses, and ultimately reduce the creation of new jobs by potentially 60%. In addition to making it more difficult to start a business, current entrepreneurs would also have a more difficult time finding new sources of funding, resulting in more possible business and job losses. These businesses need this capital to grow and create jobs, and without it, many will fail.
I wrote a post following up on my personal blog as well called Brilliant Idea: Make It Harder For Startups To Raise Money.Â Capital Entrepreneurs is against this portion of the bill.Â It will be disastrous for CE members and the economy as a whole.