• WisBusiness

Wednesday, April 21, 2010

Taking pot shots at angels: Federal regulation could kill investing


By Tom Still
George Bernard Shaw, the Irish author, wrote that "in heaven an angel is nobody in particular."

Sadly, the same appears to be true in Congress these days.

In the rush to punish Wall Street for sins real and imagined, Capitol Hill may also precipitate a fall from grace for a class of Main Street financiers essential to America's innovation economy: angel investors.

The financial sector reform bill being pushed by U.S. Sen. Christopher Dodd, D-Conn., takes direct aim at the wings of angel investors for reasons that defy explanation. If passed, this "Washington-knows-best" attempt to regulate some of the nation's most productive risk-takers could destroy the entrepreneurial economy.

Angel investors are often entrepreneurs who hit a home run in their own start-up businesses and who want to reinvest in other young companies. Angel investors are generally strong business executives with an eye for innovation, and they're not afraid to take a calculated gamble on companies that are too new to get financing from venture capitalists or too risky for banks.

They usually invest close to home and most often as individuals or within a family, but increasingly angels invest as members of angel networks or angel funds that offer some safety in numbers and more partners to screen potential deals.

In Wisconsin, angel investors have been in the vanguard of fostering the state's early stage economy. Five years ago, there were only a handful of angel networks in Wisconsin. Today, there are nearly two-dozen networks and funds -- and they're not shy about rolling the dice on Wisconsin companies in sectors such as biotechnology, information technology, medical device, advanced manufacturing and "cleantech."

In 2009, when most economic indicators were headed south, angel investors in Wisconsin actually took part in more deals and invested more money than in any previous year. Preliminary data from the Wisconsin Angel Network shows that while venture capital investing was down in 2009, as it was nationally, angel investing here increased.

But if Dodd has his way, these individualistic investors will be regulated out of existence.

The Restoring American Financial Stability Act, of which Dodd is the chief sponsor, would tighten regulation of the nation's financial system in ways large and small. It contains three provisions that would effectively kill angel investing in the United States:

* It would require start-up companies to register with the federal Securities and Exchange Commission, and wait at least 120 days for SEC review, before trying to raise money. Currently, fledgling companies can raise money from accredited investors without regulatory approval. Four months is an eternity in the life of a start-up company, and most would die in the vine before they ever get a chance to grow.

* It would redefine who is an angel. Accredited investors, who are people deemed wealthy enough to invest in start-ups, would be limited to those individuals with more than $2.5 million in assets (up from $1 million today) or a personal income of $450,000 per year (up from $250,000). This will dramatically decrease the supply of angels, which the University of New Hampshire's Center for Venture Research estimated at 259,000 in 2009. Those angels invested $17.6 billion in about 57,000 deals.

* It would subject investors and start-up companies to state-by-state rules versus a single set of SEC standards. Along with the new SEC filing requirement, that would add red tape, time and cost to the investment process.

In its frenzy to clamp down on Wall Street, Congress is threatening an investment community that fosters innovation, mentors young companies and generally cares about how the economy is faring where they live. Angels have helped to create some of today's biggest companies -- Apple, Amazon, Google and many more -- usually without putting anyone's money at risk other than their own.

Angel investing isn't perfect; the average return on investment proves that. But it's precisely the kind of bottom-up, largely self-regulated economic activity the nation needs as it struggles to create new companies and jobs. Only those federal lawmakers intent on a top-down, command-and-control economy would think otherwise.

-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison. Read more about angel investing at www.wisconsinangelnetwork.com

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