My Answer On Quora Re Startup America

If you haven’t started using Quora.com, you might really enjoy it. I do.

A couple of days ago, I answered the following question:

“What unnecessary barriers should President Obama’s Startup America initiative identify and remove to help high-growth startups?”

My answer is below. If you want to find the discussion on Quora.com, you can find it here.

  • Make it easier to qualify as an accredited investor. Dodd-Frank made it more difficult to qualify as an accredited investor, and set up a situation where the SEC is going to review the standards every 4 years and probably raise them, crimping a key source of capital for early stage companies. We ought not be making it more difficult for people to qualify as angel investors.
  • Repeal Section 409A as it applies to startups.
  • Repeal the AMT as it applies to Incentive Stock Options.
  • Make it substantially easier for companies to go public. The startup ecosystem needs a vibrant IPO market.
  • Allow startup companies to advertise on the internet and through investment groups or otherwise that they are raising money. In other words, repeal the prohibition on general solicitation.
  • Disallow states from collecting any fees from any startups raising funding or requiring startups to file any forms with any state agencies as long as they are complying with the federal securities laws.
  • Provide a new safe harbor for startups raising money, which essentially insulates startups from shareholder securities fraud lawsuits as long as the investors aver that they realize that they are very likely going to lose all of their money.
  • Repeal Rule 701’s mathematical limitations.
  • Reverse the presumption on Section 83(b) elections.
  • Extend the rollover period under IRC Section 1045.
  • Shorten the holding period under IRC Section 1202.
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25% Federal Income Tax Credit For Investments In Qualified Small Businesses Proposed

Update:

The text of Pryor’s bill (S.256) has been posted. You can find it here.

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We are still waiting for the actual legislative text of this bill, and will post it when it becomes available.

The American Opportunity Act will provide a 25 percent federal income tax credit for investing in qualified small businesses, including companies in the advanced manufacturing, aerospace, biotechnology, clean energy and transportation sectors. Qualified small businesses can receive up to $2 million per year in tax credit-eligible cash equity investment, of which no more than $1 million can come from a single investor. The funding is estimated to stimulate $2 billion per year of new capital formation.

Senator Pryor’s Press Release:

Feb 02 2011
Pryor: Legislation Helps Entrepreneurs Survive the “Valley of Death”
Senator Seeks to Create Next J.B. Hunt, Google or Hewlett Packard

WASHINGTON, DC – U.S. Senator Mark Pryor today introduced legislation to encourage early stage venture capitalists, also known as angel investors, to invest in small companies that have potential for significant economic growth and job creation.

Pryor said angel investors provide entrepreneurs with capital that cannot be met by traditional bank loans, often helping businesses overcome the “valley of death” which is the stage between start-up and profitability. Citing concerns about declining angel investments due to the recession, Pryor said tax incentives will lead to new growth and industries. In 2009, angel investments led to the creation of 250,000 new jobs, or about 5 percent of the new jobs created in the United States.

“American ingenuity will bring us out of our economic slump and help our nation regain a global competitive edge,” Pryor said. “My legislation fosters this growth by ensuring entrepreneurs have the capital and opportunity to succeed.”

The American Opportunity Act will provide a 25 percent federal income tax credit for investing in qualified small businesses, including companies in the advanced manufacturing, aerospace, biotechnology, clean energy and transportation sectors. Qualified small businesses can receive up to $2 million per year in tax credit-eligible cash equity investment, of which no more than $1 million can come from a single investor. The funding is estimated to stimulate $2 billion per year of new capital formation.

Pryor noted that J.B. Hunt received $25,000 from five poultry companies in 1961 to start a rice hull hauling business. Today, the $5 billion trucking company employs more than 14,000 workers. Last week, the Northwest Arkansas Council’s strategic plan cited a major need for start-up money to launch the next economic boon for the region. In addition to J.B. Hunt, other successful Arkansas businesses that benefited from angel investments include Nanomech, BlueinGreen and Vegrandis. Nationally, Google, Hewlett Packard, Twitter, Facebook, Amazon, and Apple received critical capital from angel investors.

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Startup Office Hours

Are you starting a new company? Do you want to learn the ropes? Or have you started a new company and want to make sure that you are proceeding as recommended?

We regularly host “office hours” at various locales around Seattle and Bellevue (e.g., at StartPad and the Bellevue Chamber of Commerce) where we meet entrepreneurs on a drop-in, no fee basis, to talk about the basics, and how to get started in the right way, to minimize difficulty and expense down the road.

If you’d like to meet us at one of our office hours, please email me at joewallin@dwt.com, or via twitter @joewallin, and I’ll let you know where we are hosting office hours next.

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More On The New Accredited Investor Regulations

You might be wondering how the SEC’s proposed regulations affect, if at all, prior SEC guidance on how to take into account debt on a primary residence in excess of the value of the residence for purposes of determining whether an investor meets the $1M net worth standard. And you might recall that following the passage of Dodd-Frank the SEC posted the following guidance on its web site:

Question: Under Section 413(a) of the Dodd-Frank Act, the net worth standard for an accredited investor, as set forth in Securities Act Rules 215 and 501(a)(5), is adjusted to delete from the calculation of net worth the “value of the primary residence” of the investor. How should the “value of the primary residence” be determined for purposes of calculating an investor’s net worth?

Answer: Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation. As required by Section 413(a) of the Dodd-Frank Act, the Commission will issue amendments to its rules to conform them to the adjustment to the accredited investor net worth standard made by the Act. However, Section 413(a) provides that the adjustment is effective upon enactment of the Act. When determining net worth for purposes of Securities Act Rules 215 and 501(a)(5), the value of the person’s primary residence must be excluded. Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth. [July 23, 2010]

The SEC’s proposed regulations do not change the SEC’s position stated in the last sentence in bold above.

Although the new regulations could be clearer on this point, they do say the following:

  • “The conventional or commonly understood meaning of the term [net worth] is the difference between the value of a person’s assets and the value of the person’s liabilities.”
  • They do not expressly contravene the guidance previously posted on the SEC’s web site.
  • The guidance previously posted on the SEC’s web site stating that mortgage debt over value reduces net worth remains on the site.
  • Under the commonly understood definition of net worth, which the SEC says is the test, mortgage debt in excess of value on a primary residence would reduce net worth.

Accordingly, companies should still be instructing potential investors that in order to qualify as accredited investors by virtue of meeting the $1M net worth test, any mortgage debt in excess of the value of a primary residence must reduce overall net worth for purposes of the calculation.

The new net worth definition for individuals, as set forth in the proposed SEC regulations is as follows:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property;

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Jan. 31 Is IRS Deadline to Notify Employees Who Exercised Certain Stock Options in 2010

By Stuart C. Harris
01.26.11

Section 6039 of the Internal Revenue Code requires employers to provide certain information to employees who exercised incentive stock options (ISOs) or acquired stock under an employee stock purchase plan (ESPP) during 2010.

The necessary information must be provided to the employees by Jan. 31, 2011, with a corresponding report filed with the Internal Revenue Service no later than Feb. 28, 2011 (March 31, 2011, if filed electronically).

Affected employers should take action now, if they have not done so already. This advisory provides a brief background on Section 6039 and an analysis of what information should be provided.

Continue reading . . .

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