Yesterday small businesses and entrepreneurial enterprises finally won a victory in Washington when Senators removed most of the worst portions of the pending financial reform act legislation that affected the ability of small businesses to raise equity from angel investors.
Known as the Restoring American Financial Stability Act, or the “Dodd Bill” after its sponsor, U.S. Senate Banking Committee Chairman Christopher Dodd, D-Conn., the pending financial reform legislation, which is intended to place more restrictions on banks, contained several hidden provisions that would have made it much more difficult, time consuming, and expensive to raise equity from angel investors.
The Dodd Bill had three major provisions that would have affected a company’s ability to raise capital. Before yesterday, the provisions included increasing the requirements to be an accredited investor from having a net worth of $1 million to $2 million. The provisions would have required a 120-day waiting period for the Securities and Exchange Commission to review a company’s request to raise equity, and the bill would have taken away states’ rights to regulate exempt securities. These three provisions would have devastated one of the most significant ways that small entrepreneurial businesses raise capital.
After the Senate modified an amendment yesterday, all three of these damaging provisions had been removed or modified, at least temporarily. The Senate included a provision that these issues be reviewed in four years. The Senate also added a new provision that prevents anyone who has a criminal record or has run afoul of state regulators from being involved in a securities offering for 10 years.
One of the modified provisions that would have caused business owners the most grief is the issue of defining an angel investor. Under the revised amendment, an accredited investor will now have to have a net worth of $1 million, not including their homestead. This is a reasonable compromise and won’t affect most active angel investors.
It was a hard fought victory for Main Street entrepreneurs. Angel investors from all over the country become activists for the changes that were made yesterday. The American Bar Association’s Nathaniel Doliner wrote a lengthy letter [PDF] to the Senate urging them to remove nearly all of the provisions involving small business private offerings.
The amendment was one of the first bipartisan efforts in the Senate since President Obama took office. Thankfully, there were a few cool heads in the Senate yesterday.
Sam Thacker is a partner in Austin, Texas based Business Finance Solutions.
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