The Restoring American Financial Stability Act of 2010 is the most comprehensive piece of financial reform legislation to be considered by the Congress since the repeal of the Glass–Steagall Act in 1999. Contrary to what the title of the bill might lead you to believe, key provisions target business owners and entrepreneurs directly. Specifically, the financial reform bill places new restrictions on angel investors and on Regulation D offerings. Both represent significant sources of capital for private companies in the United States. Certain amendments are being considered to mitigate the impact of the original provisions, but their adoption remains uncertain. Business owners need to prepare for potentially draconian changes to raising private capital.
The importance of angel investors to businesses
Angel investors are high net worth individuals who invest money in small, private companies that have the potential to achieve great success. According to the University of New Hampshire’s Center for Venture Research, angels invested $26 billion in 57,000 companies in 2007. Due to the recession, the total amount invested in 2008 and 2009 has fallen but roughly the same number of companies receive funding.
Angels are extremely important to growing businesses because they typically invest in companies that venture capital firms, private equity firms and institutional investors consider too small, too early stage or too risky. They also invest in crucial sectors of the economy. The top sectors receiving angel funding are software, healthcare services, medical devices and biotechnology. In addition to providing capital, they also offer access to their contacts, sales leads and valuable advice based on their own experiences. This combination of money, access and insight is the magic formula that turns today’s startup working out of a basement into tomorrow’s Google.
How the Restoring American Financial Stability Act of 2010 Impacts Angel Investors
The financial reform bill restricts who can qualify as an angel investor.
In order for a company to sell its securities to an angel, the Securities and Exchange Commission requires that the angel qualify as an “accredited investor”. This means having an individual net worth (or joint net worth if married) of $1,000,000 or having “income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.”
The financial reform bill changes this definition in Section 412 “Adjusting the accredited investor standard for inflation.” Since the current limits were set in 1982, adjusting them for inflation would raise the requirements to roughly $450,000 in income or $2.25 million in net worth. This disqualifies the majority of today’s angels. After intense lobbying by the Angel Capital Association, an amendment has been offered which would keep the income qualification at the current level and change the net worth definition to “$1,000,000 excluding the equity of the primary residence.” These limits will also be reviewed every 5 years. It’s still more restrictive, but not as bad as before.
Section 413 of the financial reform bill also authorizes the Comptroller General of the United States to conduct a study that would determine if further restrictions on accredited investors are required. The report is due with one year of passage of the bill. This opens the door for further restrictions in the near future.
Go to the article: Financial Reform Bill Could Hurt Your Company’s Ability to Raise Money: Here’s What You Need to Know
