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Startup investors could face tougher restrictions
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A provision in the financial reform package now before the Senate threatens to disrupt a key form of investing that has helped many an entrepreneur take the difficult first step from having an idea in mind to a check in hand.
But the story of a late vote on Monday -- one that begins with "Schoolhouse Rock" lessons and ends with a victory seen only on C-SPAN -- has Pittsburgh's tech and venture capital communities breathing easier after two months of heavy lobbying.
The drama started when so-called angel investors read in the bill that they would be susceptible to stricter definitions in securities law about what an "accredited investor" is.
"My heart went up in my throat," said Catherine Mott, president of BlueTree Allied Angels in Wexford.
Angel investors, or angels, provide seed money to young start-ups armed only with an idea, usually in exchange for an ownership stake. In 2009, angel investing totaled $17.6 billion and created 250,000 jobs, with software companies the most popular angel target at 19 percent, according to the Center for Venture Research at the University of New Hampshire.
Angel investors are especially relevant in Pittsburgh, where incubating universities turn thesis projects into start-up companies and city officials work to cast the region as an alternative to tech-hub Silicon Valley.
Since investor qualifications were last revised in 1982, an accredited investor has to have an annual salary of $200,000 or a net worth of $1 million. With the lobbied amendments, the reform bill would maintain these figures but forbid investors from including a primary residence in net worth calculations. It's the first step in an ongoing debate about angel investing sure to include Pittsburgh's evolving start-up community.
When it was drafted in mid-March in response to excessive risk-taking in the financial community, the reform bill included angels in the "private investment" category that is also home to devil Bernie Madoff. The provision increased the salary minimum of accredited investors to $450,000 and the net worth standard to $2.5 million.
The salary increase would have disqualified about 60 percent of angel investors, according to research by the Ewing Marion Kauffman Foundation, an entrepreneurial research institute in Kansas City, Mo.
William Carleton, an attorney and start-up counselor in Seattle, was reading the bill and "tripped over" the provision.
Mr. Carleton had no background in lobbying, and his knowledge of how a bill becomes a law was limited to the "Schoolhouse Rock" curriculum, he said. He wrote about the possible new regulation on his blog, wac6.com, which alerted the Angel Capital Association.
Not only would the new restrictions effectively cripple the national supply of angel investors, but it would have an amplified impact in Pittsburgh where the cost of living is lower.
The Pittsburgh Technology Council campaigned to educate senators on what was in the bill since it did not "contemplate the impact on small towns." said Brian Kennedy, vice president of government relations at the Pittsburgh Technology Council.
"They thought financial reform was just going to impact Wall Street, but it's also going to impact Grant Street," he said.
Lobbying efforts launched by angels in America were directed to the office of Senate Banking Committee Chairman Christopher J. Dodd, D-Conn.
"They seemed surprised by our objections," said Marianne Hudson, executive director of the Angel Capital Association. "They didn't know that much about angel investing."
From midnight until 3 a.m. one night, Ms. Mott repeatedly faxed the same three-page letter to Sen. Dodd's office.
"I thought they'd see it first thing in the morning," she said. "For some reason faxes get read by staffers."
The group behind the new standards, the North American Securities Administrators Association, wanted to update antiquated standards that fostered fraud and qualified too many investors, said president Denise Voigt Crawford.
The Angel Capital Association found the reform unfair to angels.
"By raising that threshold, you're really eliminating the middle class," said Mr. Carleton.
The two groups were "very far apart on this notion," said Ms. Crawford, who called for a compromise inspired by examples in her native Texas.
Now, the amendment maintains the $200,000 salary and $1 million net worth -- as long as the primary residence is not included in the net worth calculation. On average, the primary residence accounts for about 20 percent of a person's net worth, said Ms. Hudson.
"Here in Texas, there are many situations where you have persons who are really not sophisticated but almost all of their wealth is tied up in their home," such as a family-owned, multi-acre ranch, she said.
These citizens could qualify as accredited investors without necessarily being "sophisticated" ones, meaning they have little education or investing experience, she said.
When it comes to investor regulations, Ms. Crawford said, "We still believe that more could be done."
But after two months of work over two pages in a 1,400-page bill, the amendments to investor regulations were voted on Monday night.
Ms. Hudson watched the vote on television, arriving late to dinner with friends. It is the first time she has been late because of C-SPAN2, she said.
First Published May 20, 2010 12:00 am
