Small Business Investment

The Financial Services Bill proposed in March by U.S. Sen. Christopher Dodd could have some damaging consequences for angel investors and the entrepreneurs they support.

Crafted to boost consumer and investor protection, the proposed legislation would legally redefine what constitutes an accredited investor. That change could eliminate scores of investors from the rolls and limit funding opportunities for start-ups and emerging companies.

At present, an accredited investor must have an income exceeding $200,000 in each of the last two years (or joint spousal income exceeding $300,000) or $1 million in assets. Under the bill’s current language, those thresholds would change with inflation every five years, if not sooner.

Today, that would basically raise the bar for accredited investors to an annual income near $450,000 (or about $675,000 jointly) and an asset total of about $2.25 million.

BusinessWeek has estimated that this shift would thin the angel investor pool by almost 80 percent.

The proposed bill would also increase governmental oversight and regulation of angel and other private investments. SEC officials would have 120 days to examine private investment transactions.

Allan May, chairman and co-founder of Life Science Angels Inc. in Palo Alto, California, told the Silicon Valley/San Jose Business Journal that he was “mystified” that the federal government would want restrictions on angel investing, which he said is the main source of funding for entrepreneurs and, thus, job creation.

“These guys should be thanking us – using our own money, putting our money at risk, and not asking for loans and bailouts and all that stuff,” he told the Business Journal.

The bill was approved in committee on March 22. Officials from Sen. Dodd’s office have said he hopes the full Senate will vote on the measure as soon as mid-April.

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