Litan Warns Dodd Bill Would Harm Startups

I haven't been following the debate over Sen. Dodd's financial overhaul closely enough to have an opinion on the overall package, but Mike Masnick flags one aspect of the legislation that seems really troubling. Bob Litan explains:

Under existing law, startup companies can raise money easily and quickly from "accredited investors" -- individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be "accredited."

It's hard to overstate how important a favorable regulatory climate is to the success of startups. Some of the most important startups have been founded by 20-somethings without the resources to hire lawyers or navigate regulatory bureaucracies. And startups frequently find themselves within weeks of insolvency before they have a big breakthrough. Having a crucial round of funding delayed by four months can be the difference between success and failure. If this description of the bill is accurate (and I have no reason to doubt that it is), this provision would be very bad for the future of high-tech innovation in the United States.