Flynn’s Harp: Angel-investor alarm grows over provisions in Dodd bill

Cries of alarm went up from angel-investor groups this week as the awareness spread that a bill with potentially disastrous impact on the ranks of angels, and thus on start-up entrepreneurs, had passed out of a U.S. Senate committee without consideration of even one of 400 proposed amendments.

Mike Flynn http://www.emikeflynn.com/blog/

If the bill isn’t modified when it gets to the full Senate for consideration, the major impact would be felt in Washington, Idaho Oregon, Montana and other western states, as well as smaller communities, where the angel pool isn’t as deep as in major population centers like California. It’s in the smaller-population areas that a gutting of the ranks of angels, the network of informal investors who provide start-up capital, would impede business startups and thus hinder job creation.

Up to this point, concern over the few pages of Section 926 in the 1,300-page financial-reform legislation filed by Sen. Chris Dodd, D-Conn., has been mainly fodder for tech bloggers carrying comments of early alarm from some angel-group leaders who perceived the potential damage from the bill.

But now that it was passed out of Dodd’s Senate Banking Committee by a 13-10 party line vote, with no changes even discussed, alarm bells are going off across the angel-investor spectrum. So the effort is now under way for personal visits by angel-group leaders with their state’s senators, as well generating response from key supporters of entrepreneurs and of job-creation initiatives.

I e-mailed angel-group leaders around the Northwest and in California over the weekend in anticipation of the outcry that was likely to crescendo once the Senate committee’s punt on the bill became broadly known. At this point, it should all hit the fan, with not just angel investors but every organization supporting entrepreneurism sending wake-up calls to members of Congress.

Two provisions in the bill are at the heart of angel-group concerns. The first would repeal the federal pre-emption of state regulators for so-called Reg D offerings that allow companies to raise relatively small amounts of capital without federal or state registration. The second would raise the bar for investors to qualify as "accredited," meaning jacking up the current $1 million net worth or $200,000 annual income requirement to about $2.3 million or $450,000 of annual income.

The provisions are in this bill apparently in response to the concern that part of overhaul of financial institutions should include "consumer protection" for investors who have been scammed by investments they didn’t understand (should we include buying homes they can’t afford in this?).

And a challenge for angels is they’re a breed little understood by elected officials and state policymakers (neither of which likely has personal experience with entrepreneurism). Not helping in the process of understanding is that most angels have mistakenly viewed it a plus that they go about their business quietly with little fanfare about what they do.

One of the early alarms was sounded late last year by Liz Marchi, founder and general manager of the Kalispell-based Frontier Angel Fund, in a letter to Sen. Max Baucus, chair of the Senate Finance Committee. Baucus, a Democrat, has been a supporter of the angel investor groups that have collectively energized entrepreneurism, and job creation, in Montana.

"The proposed change to the definition of accredited investor would have the net effect of reducing by 75% an already small pool of potential angels in Montana who are beginning to get real traction with a growing population of young, entrepreneurial innovators," Marchi, coordinator of Montana angel groups, said in her e-mail to me.

Change in the definition of accredited investor "has dire unintended consequences for the recovery and for America’s greatest asset, entrepreneurs," she said.

Eric Pozo, one of the managers of the Oregon Angel Fund, says the bill in its current form would "most likely shut down our fund," which would close the most active source of early stage capital in Oregon.

The group raises $25,000 each from up to 60 accredited investors each year, with that State of Oregon matching the funds up to $1.5 million. Pozo says with far fewer potential accredited investors, "we won’t be able to achieve the critical mass required to continue."

John Pariseau, general manager of Spokane-based WIN Partners, says "the severe restriction in the supply of angel dollars that would be the immediate effect of the bill, if passed, would disproportionately affect secondary and tertiary markets like Spokane, Billings, Fargo. There simply are fewer angels who could climb over the new bar in those areas."

Villette Nolon, founder and CEO of start-up home-design website HomeSavvi and president of Seattle’s Seraph Capital (first women’s angel group in the country) says the legislation "would be detrimental to the angel community at large, but more so to women angels, whose earning power and wealth is often less than men’s."

Cathi Hatch, founder and CEO of the Seattle-based for-profit angel group Zino Society, said she’s "concerned that with more regulations and a higher minimum hurdle level that it would have financial implications for our ability to attract sufficient angel capital for entrepreneurs, and could even threaten the continued existence of ZINO Society itself."

Dan Rosen, CEO and President of Dan Rosen & Associates, an early-stage technology investment and advisory firm, and chair of Seattle’s Alliance of Angels, fears that "Congress will pass an imperfect bill just to act because there is a perceived need to act to prevent another financial meltdown."

"As a result, it could be no one will act on our narrow issue," he added. "So the bill will pass and we will have to live with the mess it creates, though I suspect if we can get their attention, they’ll do the right thing. But standing out from the noise will be the issue."

Richard Sudek, who chairs the five-chapter Tech Coast Angels in Southern California, the nation’s largest angel group, admits even his group "will be hurt" if the provisions become law, but adds "some smaller angel groups could effectively be eliminated."

Sudek, a board member of the national Angel Capital Association (ACA), which serves as the trade organization representing various angel groups, says ACA estimates that "nationally we’d lose over half of the angels."

If one of the histories that could be written about Congress were a tome entitled "Laws of Unintended Consequence," filled with chapters detailing examples of when lawmakers acted without understanding cause and effect, passage of Dodd’s bill with those two provisions intact would earn a separate chapter.

(Full disclosure: I am part of the WIN Partners group and on Villette Nolon’s HomeSavvi advisory board)

(To view previous blog notes from Flynn’s Harp, http://www.emikeflynn.com/blog/