• Become an SSTI Member

    As the most comprehensive resource available for those involved in technology-based economic development, SSTI offers the services that are needed to help build tech-based economies.  Learn more about membership...

  • We're hiring!

    SSTI is seeking a Senior Writer/Editor to serve as the lead writer for SSTI content. This position is ideal for someone who’s passionate about writing and ready to help amplify the voice of SSTI.

  • Subscribe to the SSTI Weekly Digest

    Each week, the SSTI Weekly Digest delivers the latest breaking news and expert analysis of critical issues affecting the tech-based economic development community. Subscribe today!

Financial Regulation Overhaul Alarms Private Equity Community

March 31, 2010

Finance reform legislation, bound for the Senate floor in April, could have significant repercussions for investors and entrepreneurs. The bill, introduced by Senator Christopher Dodd (D-CT), would create a new consumer protection watchdog within the Federal Reserve, install new regulations and safety valves to prevent another financial meltdown, and provide greater transparency within the financial industry. Two short provisions, however, have caught the attention of the private equity community and could change the rules for investors. The first would raise the minimum income and wealth level needed for individuals to qualify as accredited investors who may invest without forcing the company to register with the U.S. Securities and Exchange Commission (SEC). The second would allow each state to set its own rules regarding accredited investor security offerings.

The "Restoring American Financial Stability Act of 2010" is being framed by both supporters and opponents as the most sweeping overhaul of U.S. financial regulation since 1936. Intended to prevent another meltdown within the financial industry, the legislation includes increases federal oversight and transparency requirements. Highlights of the bill include:

  • Creating the Consumer Financial Protection Bureau, an independent agency within the Federal Reserve charged with enforcing bank regulations and consolidating federal consumer protection responsibilities;
  • Introducing leverage requirements that discourage financial institutions from growing "too big to fail" and new procedures to liquidate failed financial firms;
  • Eliminating loopholes that risky and abusive practices through 'exotic instruments'; and,
  • Monitoring the insurance industry and strengthening the regulation of credit rating agencies.


Though a spirited debate is expected over these changes, several groups within the angel and venture capital community have raised concerns about two relatively short sections within the 1,336 page bill. Both sections concern the regulation of accredited investors. Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC, unless the sale qualifies for an exemption. Sales to accredited investors meet the requirements for such an exemption. Current laws provide several different ways that an investor can qualify as accredited. For an individual, the investor must have a net worth of more than $1 million or an annual income of more than $200,000. If an exemption is not found, then the offering must be registered, making the company subject to SEC regulation and reporting requirements.

The first controversial section would increase the minimum net worth and income levels, which would reduce the number of U.S. accredited investors. Minimum amounts would be set by the SEC, and would be updated every five years to correspond with increases in the cost of living. The GAO would be charged with publishing a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status within the next year. In a letter to Sen. Dodd, the National Venture Capital Association (NVCA) and the Angel Capital Association (ACA) expressed concern that current discussions place this initial threshold to as high as $2.3 million in net worth or $450,000 in annual income. ACA data indicates that as many as two-thirds of all investors in angel groups would not meet this requirement. Such a threshold could drastically limit the pool of potential investors, particularly in a time when both incomes and wealth have been reduced by the economic crisis.

Another section, cited in the NVCA/ACA letter and in the Wall Street Journal's venture capital blog, would eliminate the federal preemption of state regulation of accredited investors. Sales to accredited investors would have to meet state requirements, instead of the uniform, national requirements now in place. Opponents say the change would increase the cost of angel and venture deals and introduce additional legal risks. The patchwork approach to regulation also could dissuade coastal venture firms from investing out of state.

The corresponding House bill, which passed in December 2009, does not contain the language. The Senate is expected to debate the bill sometime in the next month.

Read the current version of the Senate bill at: http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf. The NVCA/ACA letter is available at: http://www.angelcapitalassociation.org/resources/public-policy/federal-policy-issues/highlights/.

angel capital, entrepreneurship, capital