Frightened Angels

Deep in the 1,300 pages of the financial reform bill are proposed rules that investors and the entrepreneurs who rely on them to get their companies off the ground say could ground a key funding source for innovative small businesses: angel investment.

The concern about the rules is widespread, with investors in climates as diverse as the heart of techdom, Silicon Valley, Kansas City, and Austin.

The rules as they’re written would roughly double the amount of cash an investor would have to have to be considered an angel investor, barring some two-thirds of angel investors, and would impose a 120-day waiting period before an investment could be used by a company. For many small businesses looking to angel funding, 120 days could be the difference between getting off the ground or going under it.

But those concerns may well be allayed by the time any bill comes up for a final vote. Preliminary voting is slated for Monday, but the bill is still a long way from passage.

And Dan Rosen, Joe Wallin and William Carleton, guest columnists for the Puget Sound Business Journal’s TechFlash blog point out that already, the language is being massaged in a way that may lessen the impact on angel investing.

Here’s the way they break it down:

“Original Proposal to Adjust Accredited Investor Threshholds: As originally proposed, the bill would have adjusted the accredited investor financial thresholds for inflation since the thresholds were first set. This would have eliminated approximately 2/3rds of angel investors currently active. In addition, the first proposal would have required an adjustment every 5 years.

New Proposal to Adjust Accredited Investor Threshholds: As now proposed, the net worth standard for an accredited investor will stay at $1,000,000, which is where it is now, with one important change: net worth will exclude the value of a person's primary residence. In addition, the bill would require the SEC to review the accredited investor definition to determine if it should be adjusted. The first review would be within 6 months, and thereafter reviews would be not less than frequently than every 4 years. Significantly, the new language also requires the SEC to consider the economic impact of any change, arguably leaving the door open for a future decrease in the accredited investor thresholds.

Original Proposal for SEC Review of Filings: As proposed in the bill approved by committee, would have required the SEC to review all accredited investor offerings within 120 days of the filing with the SEC. If the SEC did not undertake that review in time, states would have been free to impose their own rules.

New Proposal for Disqualifications for Bad Actors: Directs the SEC to issue rules for the disqualification of offerings and sales of securities involving individuals who are "bad actors." "Bad actors" are persons with a prior record of violations of certain federal or state laws.”

So if those new proposals actually wind up in the law, instead of the originals, angel investors and the companies they support can breathe a sigh of relief.

But stay tuned to whether that’s actually the case.