Washington knows better than Entrepreneurs & Angel Investors
Angel investors and entrepreneurs are not Wall Street bankers. This distinction is obvious to you and me, but apparently not to Washington. The new Senate Financial Reform Bill, which is likely to be voted on this week, lumps the two together as one group. If allowed to pass in its current form, this bill will destroy the way in which our society helps entrepreneurs turn their crazy innovative ideas into viable job creating businesses.
Angel investors are individuals that invest in early stage businesses that often consist of not much more than a folding table, a couple of computers and lofty aspirations. However, it is these early stage investors that often invest in companies five years or younger and help get high growth business off the ground. Apple, Google, Facebook and a thousand other high growth businesses you have never heard of, all got their start because angel investors took a risk along side entrepreneurs.
It is these types of business that lead in both innovation and job creation. In fact a recent Kauffman foundation study found that between 1980 and 2005 every single net new job created in the United States came from a company 5 years old or less. It is clear that one of the keys to job creation in our country is to ensure that early stage entrepreneurs have access to capital. This is why many of our political leaders and candidates are trying to craft policies that support angel investors. In fact, gubernatorial candidate Tom Corbett is proposing an angel tax credit for Pennsylvania angel investors.
With such clear understanding that entrepreneurs and angel investing are critical to economic growth and job creation, you would think our leaders in Washington would be doing everything possible to promote this type of bottom up economic development. Unfortunately, we are seeing another example of top down Washington economic policy.
In its current state, Senator Dodd’s Financial Reform Bill would make two sweeping changes to the way in which angel investors and entrepreneurs can operate. First, the bill would redefine who would be qualified to be an angel investor. Currently individuals with either $1 million in investable assets or $250,000 in income qualify as accredited investors. The new bill would change this to individuals with $2.3 million in assets or $450,000 in income. According to the Kauffman Foundation, this would eliminate 77% of accredited investors. This single handedly would reduce the amount of capital available to early stage businesses and stunt our much needed job creation.
In addition, the new bill would require any company attempting to raise angel investment to seek SEC approval, which would take up to 4 months. As an active angel investor myself, I can say with certain that companies in this stage can rarely wait four months for funding. They will simply be forced to close up shop. Yet again this is another example of government bureaucracies getting in the way of the thriving entrepreneurs that this country needs to unleash, not restrict.
Angel investors and entrepreneurs had absolutely nothing to do with the financial meltdown of 2008, and no one believes they pose a systemic risk, so why are they being lumped together with Wall Street Bankers? Proponents of the bill say that Washington is trying to protect people from risky investments.
Yes, angel investing is risky, and starting a business from scratch is even more risky. However, it is this calculated risk taking that has allowed the United States to be the most innovative society in the world and has provided us a standard of living the world has never seen before. If Washington insists on completely eliminating risk from the marketplace they will also eliminate entrepreneurship and innovation and this, in turn, will eliminate job creation in the process.
As a society we need to be looking for ways to increase capital to early stage businesses. We need to be trying to find ways to lower the bureaucratic burdens place on our entrepreneurs. The Financial Reform Bill goes against both of these principals, and punishes us all by restricting our entrepreneurial spirit as a society.
Steve Welch
Author of “We are all Born Entrepreneurs
