I think we need to pass the bill to find out what's in it. The time for debate is over. Anyone against this bill is for the status-quo. Our country cannot afford any more delays or deception. If you oppose this financial reform bill you are probably a racist.
Does this concept of "accredited investor" exist under current law in the US? The article seems to imply that it does. If so, does it apply to both equity and debt funding?
I've never heard of such a thing, or any kind of legally-imposed qualification requirements for one private party to lend/give money to another. If this exists and is enforced, I'm astonished that it hasn't attracted a great deal of outrage.
The article also talks about SEC involvement in auditing startups. What authority does the SEC have to intervene in a business that isn't publicly traded? What if I'm seeking private funding for a startup that I have no intention of ever taking public? And even if I do at some point decide to go public, how would the SEC become involved before I start planning my IPO?
The concept does exist, and is essentially an exception to some of the normal securities laws: if you offer stock only to accredited investors, you're exempt from some of the registration/reporting requirements, on the theory that those requirements are intended primarily to protect non-sophisticated investors, so are unnecessary if you have only sophisticated investors. See: http://www.sec.gov/answers/accred.htm
Nobody's actually prevented from accepting non-accredited investors, but if you do, you have to comply with the registration/reporting requirements, which many startups don't want to do.
I was at the ACA meeting last week, and the consensus was that things are going to change, but they wont be this radical. They have an amendment that is currently going through committee that takes out some of the absurdities of this (SEC oversight, etc). We'll see what happens.
What's the difference between an "angel" investor and "begging from friends"? I mean I appreciate the difference, but why couldn't you put together a deal with an "investor" as if they were just a friend or acquaintance? Do accredited investors get any benefits your friends and family would not?
> What's the difference between an "angel" investor and "begging from friends"?
There is no difference.
> I mean I appreciate the difference, but why couldn't you put together a deal with an "investor" as if they were just a friend or acquaintance?
You don't understand. There's nothing special about friends and acquaintances. If you're taking money from folks, there are certain rules. The rules are a lot tighter for taking money from ordinary folk than they are for accredited investors. (Close family might be a third category - friends aren't.)
There are some differences depending on whether you have a "pre-existing relationship" and whether you openly advertise. So under current law, at least, your uncle offering you $10k is different from putting up www.please-fund-us.com that solicits some random person you've never met to give you $10k.
Yes, I don't understand, that's why I asked :-) The article mentioned begging friends and family for money (and this concept has come up in other fundraising situations), so I assumed there were certain loopholes for "personal" types of investment, and I wondered if this was codified, perhaps, or just an informal workaround.
Is the difference, perhaps, that you don't necessarily give family investors official shares but just offer to pay back the money personally, etc?
Technically, this is really the same thing. Either way you cut it, if you bring someone in as as a limited partner or shareholder after the company is formed, and they arent an active member of the company, then these rules apply.
How does this work with friends/family situations then? I'm not playing devil's advocate for once, I'm genuinely interested :-) The whole idea of stopping people spending money seems crazy to me, but we don't really have such rules here.
1 - Friends and Family loan you money. You. Or even the company. Loans are totally legit. THey dont get any upside, and you probably dont provide any collateral, and they dont care becuase they trust you.
2 - They invest at the formation of the company.
3 - They invest as an active partner/member of the company. This means they might have liability that goes beyond just their invested amount. They may not know this. They trust you.
4 - They give you money, and you invest it "for them". See #1. This is essentially a personal loan.
Otherwise, if your uncle invests and wants legit ownership stake, he is no different than any other angel in the world who wants the same thing.
Aha, thanks. Points 2 and 3 are particularly interesting. I guess they explain why you couldn't just bring in an angel investor as a "co-founder" (or, you could, but it'd have to be handled in an unconventional and delicate manner).
It's really frustrating the way these huge bills get created. You might have 20% good ideas, 20% toss-outs to the PACs that elected you, 20% earmarks, 20% total crap, and 20% unknown.
Is a bill like that worth voting for? You can pitch it as solving a huge problem, being an indication of rampant corruption, making progress in a key social or political movement, being a vehicle for bringing money to your state, or being a terrible mistake. Fact is, it could be all of these. Then congressmen can use legislative tricks to both vote for and against the same bill, effectively rendering any kind of simple debate meaningless. Which is the exact reason why it's constructed the way it is.
I think in terms of startups, this is the worst bill I've seen in years. And while I'm sure professional Angel organizations are all on top of the changes and such, we need to be moving in the exact opposite direction than this bill is taking us. I think real reform is needed, but I am deeply worried that the underlying theory here -- that market risk can be managed by committee or legislation -- is deeply flawed. Adding to that structural problem I have is all of these other really bad tack-ons, like giving the FDA more control over the vitamin and supplement business.
The only part of your post that I disagree with is that the bill has 20% good ideas.
If the federal government really wanted to discourage excessive risk-taking in the financial marketplace, why doesn't it allow people who make bad bets to lose money? The market offers free financial "regulation" called "losses".
Instead, the feds bailed out bondholders of large financial institutions at a rate of 100 cents on the dollar. They bailed out counterparties who took out insurance contracts from insolvent firms. They bailed out the unions that killed the very companies they worked for. They gave $billions in handouts to homeowners who bought a house that they couldn't afford.
And what happens to the prudent people who didn't make bad bets? They get to pay taxes to bail out the imprudent people. Thrift is punished and recklessness is rewarded.
Then after the fact the feds pass some anti-capitalist bill that they can trumpet in the press that does more harm than good. The feds micromanage the economy in an attempt to prevent the effects of the incentives created by their own past actions.
Going by the doctor's principle of "First do no harm", no.
And your point about corruption is well taken. This bill gives so much discretion to the regulatory bodies in definitions that it's a sure path to a lot more crony capitalism. Us small startup mammals won't fare well in such an environment.
The fact that as of now Fannie and Freddie do not come under it's preview should tell us enough....
The Confederate constitution was mostly a verbatim copy of the US constitution, but there were a few significant changes made during its adoption. One of them was the addition of this provision to Article I:
"Every law, or resolution having the force of law, shall relate to but one subject, and that shall be expressed in the title."
Despite its association with the Confederacy, this would be great amendment to the US Constitution.
EDIT: I was being facetious :)