Angel investors near deal on financial reform bill
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Lobbyists for startup investors were close to a deal last week with Senate staff and state regulators that would remove curbs on angel investing from the Senate's financial reform bill.
The possible compromise would require "angel" investors, those who buy stakes in startups in private offerings, to have a net worth of $1 million, instead of $2.3 million as proposed by the Senate bill, said Marianne Hudson, executive director of the Angel Capital Association in Overland Park, Kan. It also would scale back plans to let states regulate angel deals, she said.
"We're close to amendments that are good for entrepreneurs," Ms. Hudson said.
Three-quarters of angel investors may stop backing young companies if the proposed rules aren't changed, said Liddy Karter, managing director of Karter Capital Advisors in Old Lyme, Conn. U.S.-based angel investors backed 35,000 businesses with $19 billion in 2008, according to the Center for Venture Research at the University of New Hampshire in Durham. The bill, without changes, would make it more difficult for startups to grow, Ms. Karter said.
"That's a really bad idea when you're trying to create new jobs," said Ms. Karter. "Without capital, these companies don't exist, and they certainly don't grow."
The possible changes were discussed in conference calls and in person, as recently as April 16, between Banking Committee staffers, lobbyists and the North American Securities Administrators Association, which represents state regulators, Ms. Hudson said.
"We're still negotiating the bill," said Kirstin Brost, a spokeswoman for the committee, declining to discuss the talks further.
State regulators agreed not to pursue the broad authority the Banking Committee's bill would give them to review angel-investment deals and delay them for as long as 120 days, said Denise Voigt Crawford, president of the administrators' association and commissioner of the Texas State Securities Board in Austin.
Angel investors often back companies that aren't yet ready to raise venture capital, said Mark Heesen, president of the National Venture Capital Association in Arlington, Va. A typical deal may raise as much as $2 million, with each investor contributing as little as $25,000, said Nicholas Baily, co-founder of New York-based Belgrave Trust, a startup that sells carbon-offset securities to consumers and raised capital from angel investors.
Under federal law, such private placements are only lightly regulated by the U.S. Securities and Exchange Commission, and companies raising money don't have to disclose detailed financial information publicly. In exchange, the rules limit participation in such deals to investors whose financial profiles indicate they are sophisticated enough to manage the risk of investing in private companies.
While the new terms may keep the minimum net worth for angel investors at $1 million, as it is under current law, the language being discussed would exclude the angel investor's home equity from his or her net worth, Ms. Hudson and Ms. Karter said.
"The compromise is perfect," said Jeffrey Sohl, director of University of New Hampshire's venture-research center. "Funds for angel investing shouldn't come out of your home anyway."
Regulators had wanted to raise the thresholds to account for inflation, Mr. Heesen said. The initial proposal would have eliminated a generation of experienced Internet executives from backing emerging companies with the payoffs from selling their own companies, Mr. Baily said.
First Published April 25, 2010 12:00 am