The Unintended Consequences of Harming Angels

There is legislation currently on the Senate floor with a small section that could have a huge adverse impact on how start-ups operate. The Restoring American Financial Stability Act of 2010 (we'll call it RAFSA2010), introduced by Senator Chris Dodd, is designed to protect consumers and the overall economy from future economic crises. While many of the provisions in the bill do add necessary protections and safeguards to the high risk financial world, three sections of the bill could dramatically limit the amount of capital available to small businesses and entrepreneurs.

According to the US Census Bureau and the Kauffman Foundation, start-ups and businesses less than five years old created all of the net new jobs over the last 25 years. Over that time, angel investors were responsible for up to 90 percent of the funding these businesses received. This angel funding allowed these firms to grow and create jobs. In 2008, angels invested $19.2 billion in over 55,000 companies.

Now what exactly are angel investors? These are high net worth individuals who invest their own money in start-ups and small businesses. Angels provide the necessary investments many small businesses need. These are not investments in trading risky derivatives (which do not provide a value add to anything), but rather they contribute directly to innovation and job growth. By the current definition, an accredited angel investor must have a net worth of at least $1 million. The RAFSA2010 bill would raise the net worth requirement to $2.3 million. This would eliminate at least 2/3 of all current angel investors.

In addition to greatly shrinking the number of angel investors, the RAFSA2010 bill would make it more difficult for the remaining angel investors to invest by introducing new regulations and barriers. These barriers will complicate and delay investments by requiring a 120 day waiting period for investments to potentially be reviewed by the Securities and Exchange Commission, as well as make it difficult to raise money from angels in different states.

This will greatly hamper the creation of new businesses, and ultimately reduce the creation of new jobs by potentially 60%. In addition to making it more difficult to start a business, current entrepreneurs would also have a more difficult time finding new sources of funding, resulting in more possible business and job losses. These businesses need this capital to grow and create jobs, and without it, many will fail.

The RAFSA2010 bill was not intended to hurt small businesses and entrepreneurs. But these particular 3 sections of the bill carry huge unintended consequences that need to be addressed. The language used in these small sections needs to be clarified, and the adverse impacts need to be addressed. This legislation could negatively impact businesses just like PerBlue. There are no reasons that justify the introduction of these new regulations, and no positive benefit will be gained from them. In a time when creating new jobs is such a high priority, introducing new barriers and regulations that hamper the creation of new businesses and jobs does not make sense.

*Data and stats from the Angel Capital Association

Update - On May 17 a bipartisan group of Senators passed an Angel Investor Amendment to the RAFSA2010 bill. This amendment directly addresses the issues outlined above and removes nearly all of the portions of the bill that would have adversely affected angel investing. See the Press Release about this here. The full RAFSA2010 bill was passed by the Senate on May 21.