A Letter to Your Senator – Sen. Dodd’s Financial Reform Bill

There has been quite a buzz in the blogosphere over the past couple of weeks, regarding Senator Dodd’s finance reform bill. Everyone from VentureBeat to Harvard Business Review to Inc. has weighed in about how this bill can impact startups.

According to BusinessWeek, if Senator Dodd’s bill passes in its current form, the number of Angel Investors in the US will drop by 77%. That’s an enormous difference, and for new businesses looking for relatively small amounts of financing to get off the ground, this is a huge blow to add on to what is already a daunting challenge.

Scott Shane at BusinessWeek goes on to say:

[S]ome of the most successful startup companies transition from informal investment to institutional investment as they grow and demand more capital. While only a small number of companies that obtain an informal investment subsequently obtain venture capital financing—perhaps several hundred to a little more than 1,000 per year—these companies are disproportionate creators of wealth and jobs.

As if that weren’t enough reason for entrepreneurs to be concerned, there is another change that further complicates the fund-raising process a new business must go through. This is from Austin’s Tech Ranch partner and former Venture Capitalist, Gayathri Radhakrishnan:

Based on what has been suggested in the draft bill, start ups and private companies that are raising funds cannot close on their financing until SEC or a state regulatory authority has reviewed the filing and this could take as long as 120 days! So, instead of closing small funding cycles quickly and moving on with your product development, you are stuck waiting for your paper work to pass through the regulatory quagmire.

Even more, she goes on to note that additional changes in the bill allow individual states to also add their own layers of regulation, which means that “…as an entrepreneur even though you are raising a small amount of money each state can impose its own set of regulations. This implies that in addition to meeting the requirements of the sate in which you are incorpoarted, you will have to file in every state from which you have an accredited investor.”

In a virtual world of internet-based businesses, state-by-state regulation is already difficult to manage, if not highly illogical and impractical. Allowing each state to impose additional regulatory processes and restrictions on prospective investment opportunities throws a huge boulder in the middle of the road to both innovation and economic recovery.

Calls to Action

Entrepreneurs from across the spectrum of talents, disciplines, backgrounds and business goals are universally recognized as having a huge role to play in our economic recovery and long-term financial stability. Cutting the legs out from under one of the principle avenues of funding that helps new ventures get off the ground is devestating to entreprneurs in the immediate term, and to the entire economy in the long-run.
If you are concerned about this issue, please sign the petition to oppose the repeal of Federal Preemption of Reg D Securities Offerings, and then contact your senator and ask that they not support this bill. If you like, you may copy and paste this note in your message to them:

Sir or Ma’am:

I would like to take this opportunity to express my deep concerns regarding some of the implications in Senator Dodd’s finance reform bill. While perhaps not the target of the bill, as it is currently written, the Senator’s proposal will radically alter the funding landscape available to new businesses.

The updated income and networth definition proposed by Senator Dodd will radically reduce the number of eligible ‘accredited investors” available to assist new businesses in getting off the ground. Additionally, by opening the doors to state-by-state regulation of securities offerings, Senator Dodd’s bill further complicates the fundraising landscape by forcing entrepreneurs to comply with regulations of not just their own state, but also the state of residence of any of their investors.

Entrepreneurs and small businesses are vital to our economic recovery, and our on-going innovation. Informal investors are an enormous source of early-stage investment in new businesses. It is in our long-term best interest to encourage their on-going and active investment in new ventures. As it is currently written, Senator Dodd’s bill will have a devestating impact on the future of America’s small business and startup landscape.

I urge you to please oppose any version of Senator Dodd’s bill that hurts small business and entrepreneurial innovation by eliminating or complicating access to the funding vital to getting a new business off the ground.

Sincerely,

Name

If you are interested in reading up on the implications of this bill in more depth, you can find additional commentary in the following locations:

• A VC
• Entrepreneur
• Seattle 2.0