Suggestions For The Small Business Jobs Bill

According to Doug Cornelius, who writes an excellent blog, the SEC is readying to raise the financial thresholds for accredited investors to match what they would have been if the financial standards had been set to adjust with inflation in the first place. You can find a good post by Doug here. Doug argued in an earlier post:

Looking into my crystal ball, I expect the SEC to adjust the income standards based on inflation. That would put them at around $459,000 if single and $688,000 if married. I would also expect the standard to include some sort investment expertise and knowledge standard. Having a big pile of cash or a big paycheck will likely no longer be the only standard. At least that’s my guess.

Much has been written about how bad this would be for angel investing–about how it would wipe out 2/3rds of angel investors, and really be a set back for the angel investment community. Bill Carleton has written on his excellent blog much about this.

I agree with these concerns. Starting and funding a company today does not require the capital it required 5-10 years ago. Today, if you can raise a half million dollars, you can accomplish a lot. Meaning, that if we shut down angel investing, even in part, we can really cause a lot of harm to the startup community. As Senator Baucus himself said on the floor of the Senate, angel capital was critical to getting Apple Computer going in its early days.

Which brings me to the point of my post today: The Senate has been trying to pass a small business bill. Among the noble purposes of the bill: “to help small businesses access capital, stimulate investment in small businesses and promote entrepreneurship – all of which will help small business create jobs.” This from the Senate Finance Committee’s page announcing the bill.  

I have some suggestions for the current draft bill.

First, include in it a fix of the Dodd-Frank bill, which makes it harder for small business to access capital and dampens investments in small business by reducing the number of people who qualify as “accredited investors.” The Dodd-Frank bill states that the value of the primary residence of an investor cannot be considered in determining if an investor meets the $1M net worth requirement. The SEC quickly followed on with guidance that negative net worth in a primary residence must be counted against overall net worth in determining whether an investor meets the $1M net worth requirement. The effect of these two actions is–owning a home can only count against an accredited investor. An absurd result. As Bill Carleton states:

The SEC guidance really only makes sense if applicable law would give the mortgage creditor recourse to the debtor’s assets, in addition to the mortgaged residence.

It is unknown how many previously “accredited investors” are no longer “accredited investors” by virtue of this new law, but it could be a very large number.

Second, the small business jobs bill ought to prohibit the SEC from raising the financial thresholds until the Senate has public hearings on the matter.

Third, to truly make it easier “to help small businesses access capital,” the small business jobs bill ought to make the rules for raising capital in securities offerings easier, not harder for companies. It is time to revisit the basis for many of our private company securities laws. For example, does it really make sense to limit private company securities offerings to “accredited investors” today? Does it really make sense to allow the states to each take a fee when an investor is resident in that state, despite the fact that federal securities law is supposed to trump state securities law? Does it really make sense to prohibit general solicitation? Would it make sense to repeal many of these limitations and conditions altogether? We ought to have public hearings on these issues.

Senator Baucus is right–“Small businesses are the engine of our economy and need to be a critical focus of our job-creation efforts”–but we pass laws which are contradictory and nonsensical, which make it harder for small business to thrive–all the while talking about how we are going to help them by passing temporary tax measures.

If we want real change, we need to think more broadly than discrete, one-time tax incentives. We need to think about permanent landscape shifts that truly make life easier for small business.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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