Home Fallout From Financial Reform Bill May Hamper Angel Investing

Fallout From Financial Reform Bill May Hamper Angel Investing

Throughout the spring, we covered the financial reform legislation as it wound its way through committee and Congress. The final version – Dodd-Frank Wall Street Reform and Consumer Protection Act – was signed into effect by President Obama on July 21. And while some of the provisions that were most troubling in earlier versions were axed before the final bill was passed, there is still a sense that the repercussions from the legislation might dampen investment, particularly at the early stage and particularly from angel investors.

Liz Fries, a partner at Goodwin Procter explained to ReadWriteWeb today what some of the implications of the financial reform bill might be.

Income Requirements for Accredited Investors

When the Senate Banking Committee approved an early version of the bill, it increased the income thresholds for “accredited investors” would have required the SEC to revisit these regularly “to reflect the percentage increase in the cost of living.” These numbers – $1 million in net worth or an annual income exceeding $200,000 in each of the two most recent years – were adopted in the early Eighties, and adjusting these for inflation would have changed that dollar figure dramatically. Many experts estimated that these changes could have eliminated over half of current angel investors. The National Venture Capital Association, the Angel Capital Association, and others voiced their protest.

In the final version of the bill, the net worth threshold has been raised, and while the dollar figures for income stay the same, the value of the investor’s primary residence is now excluded from the calculations. Fries contends that this will likely disqualify some angel investors, but “only at the margins.”

Focus Shifts from Legislation to Regulation

Fries calls this “Stage 2” of the financial reform efforts, and says that the focus will shift now from Capitol Hill to regulatory agencies. The SEC in particular will be tasked with writing and reviewing some 95 new rules and conducting over 17 studies. In particular, the agency will be revisiting the definitions and requirements, both for investors and for funds.

While Fries seemed optimistic that these definitions are out of the hands of legislators, the verdict is still out on how the changes introduced in the Dodd-Frank bill will impact investors and entrepreneurs – as well as the overall economy.

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The ReadWrite Editorial policy involves closely monitoring the tech industry for major developments, new product launches, AI breakthroughs, video game releases and other newsworthy events. Editors assign relevant stories to staff writers or freelance contributors with expertise in each particular topic area. Before publication, articles go through a rigorous round of editing for accuracy, clarity, and to ensure adherence to ReadWrite's style guidelines.

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