Public Policy and Venture Capital

I did a "Room For Debate" on the New York Times yesterday with Ken Auletta and John Markoff. Here's the first part and here's the second part. The topic was Google; are they too powerful and if so, what the government should do about it.

I said this about anti-trust efforts in technology:

I am not big fan of governmental intervention in technology markets.
Technology moves very rapidly and one decade’s dominant monopoly is the
next decade’s fading giant.

I would prefer our government focus on creating the right
environment for innovation and new technology development so that the
next Google can come along and change the game again. Things like
immigration reform (the start-up visa movement), patent reform
(elimination of software patents), net neutrality and open spectrum are
all much more important than filing an antitrust case against Google.

No sooner than when I wrote those words I found out about another public policy issue that impacts the technology startup world.

William Carleton pointed out to me yesterday on this blog, in the comments, that Senator Dodd's financial system reform bill contains two provisions that will be very harmful to startups. If passed as currently drafted, the bill calls for:

(1) increasing the threshold for accredited investors

(2) ending the federal preemption of "all accredited" offerings, so
that states would be permitted to regulate such offerings, even if they
meet federal requirements under Rule 506 of Reg D.

I'm not a security lawyer and I hope we get some discussion of these two points from security lawyers in the comments, but both of these seem wrong headed to me.

The angel funding mechanism is potentially the single most important funding mechanism in startup land. Most entrepreneurs get their first real investments from angels, not VCs. If you lower the amount of angel capital in startup land, you'll end up lowering the number of entrepreneurs who can get their projects off the ground.

So now there's one more thing we all have to start calling Washington about. I'm going to call my representatives about this. You might want to do the same. And while you have them on the phone, tell them we also want their support on the startup visa movement, elimination of software patents, net neutrality, and open spectrum. That seems like a lot to ask, but this stuff is important and getting more so.

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Comments (Archived):

  1. Guest

    hey, if you are calling, tell them also to add provisions for Predictive/Preventive and Personalized (P3) Medicine in the Health Care Bill :))The private health care system does not care about prevention and personalization. They need sick people. There is a lot of cool technology that can get this P3 concept moving fast, if the right incentives were in place.

  2. kidmercury

    And while you have them on the phone, tell them we also want their support on the startup visa movement, elimination of software patents, net neutrality, and open spectrum.i hope folks will think about these issues and whether or not they really benefit them. at this point government is broken, less government = better government. government is the problem.i don’t know what the deal is with these accredited laws, raising the requirement definitely sounds sketchy IMHO, especially if we are trying to boost the economy. this looks like a classic example of government’s owners using government to erect competitive barriers and thus stifle competition. i doubt the people have any political influence left, though, the system is profoundly dysfunctional. when we embrace game currencies, then we can make investing on our own rules, with each virtual world developing their own accreditation process (the early foundation for which IMHO is some of the online reputation systems we are seeing, like badges in game play environments).always glad to see you go political, boss. when blog stars go political, that is when we’ll start to get real grassroots change, and a reawakening of of the notion of active citizenship. i bet future blog stars will even go political for marketing purposes, lol

    1. thewalrus

      i believe that a bigger problem than the gov’t being ‘dysfunctional’, is that we as citizens are overly cynical and apathetic. we underestimate our ability to drive grassroot changes in the current set-up….its an easy way out to say its broken, lets start from scratch (note: this always happens in SW projects also).appreciate your thinking and contributions here kid…..and i think the key is what do the ‘transparent influencers’ do with that influence? which is why i really like to see fred’s willingness to touch hotbutton and political issues….i don’t have to agree with all of them……but the transparency strengthens credibility, and credibility equals is king, but only if you use it 🙂

      1. kidmercury

        agreed. the problem is entirely with ourselves; govt is simply a reflection of society, IMHO. once we get serious about change, we will get it soon enough, and wonder why we didn’t pursue it sooner.

        1. JLM

          If the people are “on the make”, then our government is going to be on the make.

          1. thewalrus

            agree. its not reasonable to hold politicians to a higher level of standards than we do ourselves. how many times have we heard someone say, “i don’t work for company x,y,z, i work for myself, they just pay my paycheck”……or take advantage of some situation just because we could, not because it was ‘right’ or in-line with our values…..and then in the same breath complain the government isn’t serving the interests of the me, the country, etc. we need to hold ourselves accountable in our day-day actions……living what we believe at a micro level… what drives real change at a macro level.and as long as the web remains an open platform……it will continue to cut out middle-men wherever there are inefficiencies……government will be no different than any other ‘industry’….

      2. ShanaC

        Cash is king only if it buys a good or service that one values! Amen to thatAs for a dysfunctional government. “We the people” are the only ones to blame for that. We don’t recognize our own personhood even in its most abstract sense as much as we used to, and the obligations that come from it. We’ve become “massive bodies” en bloc for power for rights. And while that does move and shape power, sometimes very efficiently, the fact that we are now moving away from cultural idea of E Pluribus Unum, is really damaging. I’m not part of some body or bloc that needs to be culled for a vote, I’m a variegated person, and it makes it very hard to be transparent when come election time or come money time in order to cull a vote I am part of a bloc. It hides other issues that I am very willing to understand in order to make life more palatable to me…

  3. Nick Oliva

    The notion that Google is “too powerful” is reactionary. “Too disruptive” I can believe… that’s a good thing, as the synthesis that comes out of the industries they shake up is beneficial. Even in search technology enough people seem to be getting behind Bing and interested in their new developments to make things interesting.But I think you’re asking people to spread the message too thinly. “…while you have them on the phone…” you should just stay on the one message you’re trying to get across. These guys have enough on their plates without the technology industry trying to get them to promote an entire agenda. The accredited investor problem seems pressing for the reason Carleton pointed out. Net neutrality (though I don’t agree with it entirely) seems to be on top of the list to me too. If you had to pick one to go after, which would it be?

  4. Brian Wang

    Increasing gov’t regulation & restrictions is not the right move for the single most important source of economic growth… technology.

    1. AgeOfSophizm

      My guess is technology will completely sidestep any regulatory effort anyway, it (almost) always does!

  5. danvers

    I’m an English lawyer, so not qualified to comment on the details of US securities rules, but from this side of the pond, they already look unnecessarily complicated and with harsh penalties for getting them wrong. Allowing individual States to make their own rules would only magnify this effect and I am guessing that California would be among the worst offenders.So yes, please go ahead and change the rules to make it harder to raise money in the US. It will generate the biggest work bonanza for London since Sarbanes Oxley.

    1. David Smuts

      Well said Danvers!”So yes, please go ahead and change the rules to make it harder to raise money in the US. It will generate the biggest work bonanza for London since Sarbanes Oxley.”

      1. GraemeHein

        Not London – Labour is in the middle of a scorched earth campaign to destroy their economy and competitiveness out of spite for the incoming Tory government.Toronto, Calgary, and Vancouver are going to eat your financial lunch. Lower corporate taxes, lower personal income taxes (especially if healthcare goes through), governments at all levels are cutting and simplifying regulations and have no class warfare agendas. It’s an ideal place to have your corporate headquarters, as Canada also isn’t aggressive about global corporate earnings in the way that the US is. You can also send Canadians abroad and they only have to pay local taxes if they have minimal ties, whereas Americans are liable to the IRS as long as they hold citizenship which can’t be renounced for tax purposes.It also helps that Bay street is home to the only solvent banking system and that as the largest, most secure oil supplier to the US, there’s no chance of the kind of Congressional interference that met offshoring headquarters to Bermuda. Plus it’s a 1.5 hour flight to NYC and 2 to Chicago.

        1. JLM

          The Canadian banking system is the strongest in the world.

    2. kidmercury

      the rationale behind states’ rights is that a free market for regulation will exist as well; if one state is too inefficient, businesses will migrate to a friendlier environment.

      1. Mike McGrath

        If they have the means to.

      2. Mark Essel

        It’s the federal regulations that wil drive us to more open markets to get seed funding.

        1. kidmercury

          possibly in the short-term, but with the current dysfunctional nature of government, i think it will be corrupted soon enough, IMHO.

      3. JLM

        Just like when Michigan and Maryland and New Jersey enacted millionaire taxes and the millionaires all moved to Florida.Money is mobile! And when you’re mobile…..

        1. ShanaC

          Just be aware that you could apply that logic to anywhere in the world. Aka why tax shelters and international law are a big deal. Slippery slope, here and now. So the real implication is where in the world should you do an investment, not which state.

  6. andrewparker

    This post is just begging to end with a Cause Caller link all queued up to call the right people…

  7. Adam Neary

    One of the key drivers behind raising the threshold for accredited investors is that thousands of “ultra-rich” investors put money into Madoff, got burned, and now they are screaming for the federal government and SIPC to do more, pay more, and prevent this in the future.The bad news is that the SEC should have done a better job regulating, but the idea that investors need more protection is no doubt causing a lot of legislative shrapnel. As happens in kindergarten, the group gets punished for a few bad actors.I wish there was a smart way to separate “innovation” and “technology” securities from get-rich-quick schemes and complex derivatives. Unfortunately, they all appear to fall into the “stuff we don’t understand” bucket on the hill. Perhaps the right answer is to drive a distinction between these two classes of securities from a regulatory standpoint?

    1. David Smuts

      And create more bureaucracy? No thanks! If Senator Dodds is trying to protect wealthy investors from the likes of Madoff then lifting the accredited investor threshold will not produce the results. Most Madoff investors had much higher income and assets than is currently being proposed as a new threshold.This will be terrible for innovation. We should be looking at more tax breaks for investors putting money into seed stage companies. What planet does Senator Dodds live on?

      1. Adam Neary

        Absolutely! We agree. I am saying that the Madoff case, as an example, is causing a whirlwind that has all sorts of unwanted consequences, particularly on technology and innovation.My thought would be that if it is possible to separate innovation and technology-related investments from complex derivatives and investment vehicles, the bureaucrats could have their field day on the latter (if that is what the political climate demands) without hampering the former. Right now, my contention is that they are all treated the same, and that’s causing much of the problem.

        1. Aviah Laor

          Here is the only regulation needed:Don’t invest in something you don’t understand (or just call it gambling)

          1. Adam Neary

            I am with you, and I would add that if you invest in something you don’t understand and receive 40% annual return for 20 years, don’t ask the government for your lost money when it goes pear-shaped.But we don’t have to convince the good folks on this forum. We would have to convince Congress, and that’s another matter altogether. Better, I think, to pull our investments out of their pool so they can have their dogfight without scraping us up. Just one approach, though.

          2. AgeOfSophizm

            couldn’t have said it better myself!

        2. David Smuts

          One could attempt to seprate purely financial investment funds from say other investments but this creates a lot of work and in my view does not solve the problem.Senator Dodds is trying to address the problem of investors getting burned by Madoff scamsters (presumably). He’s attempting to do this by raising thresholds on who can be an accredited investor. OK, genuine problem identified Senator Dodds and 10 points for effort. But this does not solve the problem because most investors who get scammed in financial investments are savvy, well qualified, well advised, wealthy investors any way! The result of an increase in the accredited investor threshold would in fact create a much worse problem: stifling innovation (read my lips: no more job creation!).How does seperating investments into two distinct classes address the problem Dodds is trying to fix? Wealthy investors will still get shafted by scamsters even if the current asset threshold on just finance related investments are raised.The problem, in so far as protecting investors in financial funds is concerned is not the threshold amount but the oversight of the performance of financial funds. This is the SEC. This is the problem.

          1. ShanaC

            Madoff built his Ponzi Scheme on the Web of Trust method, how do you create the web of critical questioning and trust method?

        3. AgeOfSophizm

          I completely agree, financial innovation only helps the creators and usually harms mainstreet. It got completely out of hand and now we are left to deal with it today. We should be encouraging REAL innovation with huge tax breaks, at least leveling the playing field for smaller start-ups!

      2. JLM

        We have lived through this before and it was called the Tax Act of 1986 which stopped abusive practices on accelerated depreciation and passive activity loss allocation.When the SEC casts its indiscriminate net, the game fish get caught with the trash fish.

    2. JLM

      Bingo! You are absolutely correct.

      1. Andre D


        1. Andre D
    3. JLM

      When you mention the SEC, immediately remind yourselves that this is the bunch which saw no problem with “naked short selling” while the stock market was tanking having earlier thrown the uptick rule overboard within sight of land.The lions of industry are strong but when it comes to betting on the long term winners put your money on the jackals. Money is like carrion, it attracts scavengers, fierce scavengers.

    4. hardaway

      There’s probably a lot of truth in what you say. But I’ve been angel investing all my adult life, and if they raise the threshhold for accredited investors, I could be eliminated because I’m just a person who loves to be a part of innovation and is willing to pay the price for doing so.Raising the numerical requirement is a stupid idea, because by this time (age 68) I’m a pretty knowledgeable and experienced investor. Shouldn’t accreditation be based on answering questions about your understanding of risk, or of what you are investing in, rather than a dollar figure? Those Madoff investors didn’t know enough about what they were investing in, and that’s a function of involvement in your investment, not a questions of how much money you can afford to lose. Don’t invest passively from the sidelines, and you have a better chance of winning. Passive investment is magical thinking.

      1. fredwilson


        1. hardaway

          What did that mean? What word?

          1. fredwilson

            ‘Word’ means I agree 100pcnt

  8. Aviah Laor

    After all, the investing regulations proved to be an excellent tool to protect the public & prevent respected investments banks from collapsing. So why not just keep the momentum?Anybody in UK should go to John Maynard Keynes’ grave and put a note there, telling him that the new policy to fight depression and jobs loss it to put barriers on investments of wealthy people.

  9. Pascal-Emmanuel Gobry

    I understand what (1) means, but not (2). Could someone explain it to me in plain English?

    1. Brett Topche

      Someone please correct me if I’m wrong, but I believe the rule is currently as follows. If only “accredited investors” (i.e. people or entities with income and/or assets above a certain level) are participating in a financing, the financing is only subject to federal regulations (as opposed to being subject to regulation by the federal government as well as the state governments in each state in which any investor in the round resides). Should this proposed change pass, every financing round would be subject to regulation by each state where any single investor resides. This could create a huge mess of confusing and (depending on the specific states involved) sometimes conflicting laws that would apply to any financing, likely increasing legal expenses and adding a degree of difficulty in getting deals closed.

      1. Pascal-Emmanuel Gobry

        Ahhh. Ok, thanks a lot, that’s very helpful.Yeah, I can see how that would be very bad.

      2. JLM

        This is a modestly complicated subject and I am operating from memory here but here goes.What is really being discussed here is the regulatory environment in which individual states’ Blue Sky Laws (1917 SCt case, Justice McKenna) were attempted to be coordinated.The SEC through the 1933 and 1934 Exchange and Securities Acts set up the regulatory schemes for the issuance of securities, the operation of exchanges, the licensing of brokers and the qualification of investors.Most states follow something called the Uniform Securities Act of 1956 which provides for certain exceptions to their own securities laws if the issuer follows SEC Regulation D pertaining to private offerings and a particular SEC Rule which I think is 501.This SEC rule pertaining to “accredited investors” is what states rely upon to waive registration with that state.To clean things up, the National Securities Markets Improvement Act of 1996 attempted to clarify all the then outstanding conflicts including the issue of state listing and accredited investors. It is this law which will likely be changed to tinker with the accredited investor definition.Blue sky laws also impact registration of broker-dealers and registered reps (stock brokers) but my memory fails to serve me other than to recall that the NASD tests (e.g. Series 63) get you clear of most state requirements.

        1. ShanaC

          That sounds complicated

  10. hud

    government clearly has the levers to help and hurt innovation.I reported a story last month for Monocle magazine about the tech scene in Iceland: crisis there has been an opportunity for smart young people out of work to create a vibrant community of startups. entrepreneurs, however, are hampered by an embryonic (and damaged) VC environment, coupled with government restrictions / ceilings on angle investment and unfriendly taxes for entrepreneurs.successful companies there have reason to consider relocating away from the country and would-be companies have a lot more to overcome in order to get their project off the ground.

  11. Brian

    While we’re at it, tell them to get rid of the accredited investor nonsense entirely. There is no good reason why some people are freely allowed to determine what to do with their large sums of money, while others, with less money, are prevented from doing the same. There are tons of examples of rich people getting taken advantage of just like poor people would (Ponzi schemes anyone?)

    1. AgeOfSophizm

      I second that! Hasn’t the last two years shown us that ALL investments are risky?? Is the gov’t going to start dictating which equities a small time investor can participate in? Or maybe they will make all small guys just buy treasuries b/c they are “low risk” (not to mention an excellent way to continue funding their drunken sailor spending habits).

      1. JLM

        I completely agree with you intellectually. Absolutely without reservation.However:You are living in a dream world if you think the government is not going to do something to discipline the likes of Sir Allen Stanford and his phoney Antiguan certificates of deposit. This was a brazen crook peddling bubble gum complex securities. It was the dumb investors who allowed this to happen to themselves because they thought you could make 2-3 times the market rate of return. Hell, they were surprised to learn their faux CDs did not have FDIC insurance.The Congress sees itself as saving these dummies from themselves.The government plays to populist sentiment and is even willing to stomp out corruption if it is convenient.

        1. AgeOfSophizm

          Its all about transparency. We just need to educate the “dumb investors” that most (if not all – empirical evidence might show this to be true) money managers cannot beat the market. If people were to understand this simple fact, it could take a LOT of power away from both politicians and fund managers!

          1. JLM

            Do you think that any of Madoff’s employees ever suspected everything was not Kosher?The saddest thing in the world is to see the combination of folks who will band together to cheat their fellow man. At least in the case of the Italian or Russian Mafia, there is an organizing theme of common ancestry.

    2. ShanaC

      Correct it is how do you adequately disclose and explain risk. Forms are not going to do it for you. Education will, but only so much: unless we say that you have to know the area really well to invest in it (that’s not helpful either). It’s how do you make public in understandable ways the complicated stuff, the jargon. That lowers risk.

  12. Mark Essel

    In order to instigate change we must have both the conviction to spend the time necessary to reach out to representatives, and have the faith in their integrity to comply with the the will of people which would limit government power/authority.It’s rare for any government to willingly give up control of anything.

  13. adamwexler

    “(1) increasing the threshold for accredited investors”if the threshold were to move, it should go LOWER, not higher! it doesn’t nearly take as much money to launch a company in 2009 as it did just ~5 years ago in 2004 (cloud hosting, info access, etc).it can be difficult to run a company on nothing, but a lot of these micro-funds a la y-combinator give the necessary base to really get the ball moving.

  14. Mike McGrath

    I’m surprised they have not tried legislation to make VC’s be white, male, and Ivy League educated as well (90+% anyway?). This sort of “reform” ensures that the beneficiaries will be in the same social circles.

    1. JLM

      OMG, you mean that isn’t the law?What the hell did I spend all that tuition at Wharton for? Ooops, forgot I went on the GI Bill, never mind. LOL

      1. ShanaC

        Yes, but that’s you. Not all of us are doing that.

  15. reece

    hasn’t the angel capital market shrunk enough in the last year?this policy seems inversely correlated with the American dream of entrepreneurship…

    1. JLM

      Hmmm, wonder what has happened in the last year? Hmmm?Oh, yeah, Obama! LOLYou cannot simultaneously make war upon and attempt to encourage the entrepreneurial caste of America to make jobs and expect a good outcome.The beatings will continue until the job creation rate is increased!

  16. jpwoodland

    “Technology moves very rapidly and one decade’s dominant monopoly is the next decade’s fading giant.” Curious for your thoughts on this Fred. As an investor in consumer internet technologies, do you expect those that hit it big only to fade as others rise? Does that change your approach to investing? Sorry it’s off the main topic of the thread…

  17. Brandon Kessler

    This link says that #1 is an adjustment for inflation:…Don’t know what that means in dollar terms. Nevertheless, any increase would be atrocious. I just called Schumer’s NY office: 212-486-4430.

  18. twinsrcool32

    Fred,I agree 100% with your concerns, I started my business with my own money and 4 angels — who, if this law passes may NOT be considered accredited.We have gone on to create 50 jobs in NYC and MD.but, my main point is focused on your concern with this particular law and how it will affect business, and the growth of businesses in our sector.I want you to extend that same premise (concern for business and how it will effect you) to heath care…and the government involvement in healthcare.if you truly think that this Dodd provision in the bill will have consequences (and it will) — imagine what a Senator (or unelected bureacrat) can do when it comes to determining benefits, tests, and long term care…our HC system is definitely in need of reform — i (and many others) just dont not want our govt involved in it.rock on,andy m

    1. JLM

      The linkage to jobs is the “for the children” hook on this matter. Use it with reckless abandon.

  19. Druce

    not to hijack the thread, but possibly of interest on the subject of net neutrality- How Robber Barons hijacked the “Victorian Internet” [the telegraph]……Gould, armed with his own newspaper, The New York World, set out to conquer the telegraph service via financial hijinks and public pressure. First he organized a bear raid on the company, lowering the value of its stock. Then he constructed several smaller telegraph firms and denounced Western Union as an unscrupulous monopoly….Once installed as the dominant proprietor of the nation’s telegraph system, public trust in the confidentiality of Western Union transmissions evaporated. Gould “scanned the telegraph, or manipulated it, as an open book to the secrets of all the marts,” Josephson wrote.No one could ever demonstrate that, in fact, Gould read the telegraphic correspondence of his competitors and enemies. But that would have been difficult to expose, given Western’s already corrupt relationship with Associated Press…..In exchange for exclusive access to Western Union, both APs promised never to “encourage or support any opposition or competing Telegraph Company.” In turn, newspapers that subscribed to AP pledged to use AP only. And no new newspaper could join the news cartel without the support of current AP members in the region.Thus, “if a newspaper publicly criticized the AP, it risked losing its membership,” notes the historian Paul Starr. “Not only, therefore, did AP itself enjoy a monopoly position; its member newspapers could also protect themselves against local competition.” …And so Associated Press and Western Union effectively created a criticism-proof information system that married content creation with a national network, and in which few competitors could surface.[and called to testify, Western Union said the monopoly Gould had decried when he was driving down the stock was of no importance]…During the long controversy in Congress over who actually won the districts in the disputed election of 1876, Western Union secretly siphoned to AP’s general agent Henry Nash Smith the telegraph correspondence of key Democrats during the struggle. Smith, in turn, relayed this intelligence to the Hayes camp with instructions on how to proceed. On top of that, AP constantly published propaganda supporting the Republican side of the story.

  20. jsrand

    Surprisingly little noise out there at this point, and I have seen nothing from the NVCA, but that may be due to the early stage of the legislation. There is supposedly a House version that doesn’t aim to touch the accredited investor definition or the federal preemption of state merit review. Having dealt with state merit reviews in the past, I think the preemption issue, in particular, would be disastrous for venture finance, and for angel financings in particular, since angel syndicates are often spread across a number of states.Scott Murphy, who is from the Albany area, and Jim Himes (my Congressman) are two guys in the House that I would consider to be knowledgeable in this area.

  21. Scott Edward Walker

    Fred – As a securities lawyer for 15+ years, I can unfortunately attest that Senator Dodd’s proposals (i.e., to increase the threshold for “accredited investors” and to end federal preemption) would be disastrous for angel funding. Coincidentally, I just wrote a post yesterday, “Angel Financings: Legal Tips for Entrepreneurs” ( in which I discuss these issues in tip #5 (“Comply with Applicable Securities Laws”). As noted in my post, under current law, the rule of thumb in connection with private placements (including angel funding) is to sell securities only to accredited investors in reliance on Rule 506 of Regulation D for two significant reasons: (1) Rule 506 preempts state-law registration requirements pursuant to the National Securities Markets Improvement Act of 1996 – which means, in general, that the issuer merely must file with the applicable state commissioners (i) a Form D (see my recent post regarding Form D here:, (ii) a consent to service and (iii) a filing fee; and (2) there is no prescribed written disclosure requirement if the investors are “accredited”. If Rule 506 would no longer preempt state law, it would open a Pandora’s box of compliance and disclosure issues at the State law (with substantial related legal fees and expenses). Moreover, if the threshold for accredited investors were increased (the current threshold is set forth in my post), there obviously will be a smaller pool of investors. This is bad news for startups and, as you suggest, we should all start calling our representatives in Washington. Thanks, Scott

    1. JLM

      Before there is a huge public outcry on this issue, it is important to understand that, in great measure, this modification is driven by the corruption visited upon the marketplace — often targeting specific states, eg. Texas and Florida — by such folks as Sir Allen Stanford of Antiguan fame and greatly diminished fortune.It may be useful to seek an exemption for venture capital rather than taking on the tsunamai of outrage that the SEC did not protect the average citizens (accredited investors all) who were duped by Sir Allen and his imaginary, uninsured certificates of deposit which were “paying” 2-3 times market rates of return. This is a huge wave of discontent and Congress loves playing to the populist concerns of the electorate.Remember that when it looked likely that there would be a run on the bank, the FDIC upped deposit account insurance to $250,000 and in some instances actually insured it all. This is the mindset which jerks its knee back to re-set accredited investor thresholds.Congress’ phone lines and mail boxes are being filled with incendiary invective about this situation because these are “life savings” losses effected by corruption rather than a simple “angel” investment gone wrong. And these are voters.Your natural allies in this matter may or may not be the investment banks who may or may not like the idea of more complex underwritings with more disclosures. You will have to puzzle this out.

      1. Scott Edward Walker

        I think you’re missing the point: if Federal preemption is ended under Rule 506 and each State is given the authority to regulate all seed financings/angel fundings, it will materially adversely affect startups’ ability to raise capital. As a securities attorney who has dealt with State regulatory authorities for 15+ years, I can assure you that it is a nightmare. Indeed, in any financing, a legal analysis would be required with respect to applicable State law for each State in which (i) the offer originated, (ii) the offer was delivered or received and/or (iii) part of the sale transaction took place, which will likely trigger separate securities filings for each State (not to mention the significant disclosure requirements, which will vary State to State). This is why the National Securities Markets Improvement Act of 1996 was enacted: to promote efficiency and capital formation and to provide more effective and less burdensome regulation between the States and the Federal government. We have a bunch of leaders in Washington who do not seem to understand the importance of entrepreneurship in this country and are merely trying to score political points.

        1. JLM

          I think I am in agreement with what you are saying but I was making a different point with which your last sentence appears to agree.Currently under the law each and every state has the right to regulate all financings except for those which are exempt under the provisions of Regulation D and which are otherwise in compliance with applicable SEC regulations.This is the “blue sky provision” which the 1996 NSMIA attempted to uniformly regulate by its very passage and the creation of what is called “covered securities”.Even though securities are apparently “exempt”, it is good practice to drop a copy to each state securities department for no other reason other than to ensure they are OK with the broker-dealer implications which are not quite as clear.The point I make is this — the current legislative initiative does not see itself as regulating the securities business with all of the obvious implications you have raised, it sees itself as saving dumb asses from themselves and thereby currying favor with voters. They are pandering to the dumb asses who bought the Stanford CDs.What goes unsaid is that Stanford, et al, intended to violate the rules regardless of what they might be.

      2. ShanaC

        On it.

  22. Joe Wallin

    Please sign the petition protesting the repeal of federal preemption of Reg D all accredited offerings. Petition can be found here:…. Thanks!

  23. Kostis

    I don’t think you are right about government intervention in technology markets. Too much intervention is a bad thing, of course. But think about the Microsoft-Netscape case.Your argument was Microsoft’s main defense. The tech market is a dynamic market, don’t worry about us, we’ll probably be overtaken by others in a few years anyway.If Microsoft had not actually lost that case, would that truly have been the case? Probably, eventually, though it would probably take much longer to happen and it would be much more difficult. What would the web look like if IE held 99% of the market, had no incentive to support open standards (quite the opposite in fact), and did not offer a choice for the default search engine?

    1. JLM

      Actually, didn’t MS lose that case before they won it?

  24. bradburnham

    I completely agree with Fred (and Thoreau) “that government is best which governs least”… but I also think that enlightened government can efficiently shape markets to encourage innovation. The trick is to regulate at an architectural level not to try to manage specific technologies or actions. That is why I passionately believe that the government can and should play a role to ensure the net remains neutral.My instinct, like Fred’s, is to say that the government should be very careful when they step into fast moving technology markets. That said, I do think that significant concentrations of market power can slow innovation and that we should be consistent in our support for open, “permissionless”, market access. I think it is easier to make the case that without a net neutrality rule, the cable/telco duopoly will use their natural monopoly position in the local loop to extract incremental revenues from web services providers to the detriment of young innovative startups than it is to argue that Google’s network effect on the advertising side is enabling it to extend its influence into mapping (although Bill Gurley does a pretty good job here ) but we should be alert to the possibility that concentrated market power is slowing innovation regardless of the source of that market power.Fred would argue rightly here that Google’s market power is more ephemeral that Comcast’s, and I would agree, but I think it’s real source is less about technology and more about network effects and that those can be a sustainable advantage, that could be abused.

    1. JLM

      Please forgive my cynicism. But we really no longer have a cohesive functioning government, we have out of control politicians who will position themselves as close as possible to the feed trough and stick their snouts as deep as possible to ensure their own self gratifying election, re-election and concentration of power.The telco/cable cabal are seasoned grafters, lessees of politicians and command such a big pot of money that they will rent, purchase or option whatever number of politicians necessary to obtain the desired outcome.The only real chance to impede this inevitable corrupt evolution is to link the creation of jobs — the current ‘for the children’ mantra — as the rallying cry to create enough inertia for the status quo to make the peeling back unthinkable.The “can’t get the toothpaste back in the tube” logic which has truly stymied immigration reform for decades.

      1. kidmercury

        i agree JLM. govt is broken, that is the simple problem. can’t use a broken tool, gotta fix it first.i second your sentiment regarding job creation. the one thing i would note is that IMHO job creation needs to be linked to jobs that people actually need. i think that is another part of the dysfunctional government and economy: government created all these tax incentives and subsidies to help fuel the housing/derivatives bubble, this created an excess amount of housing and banking jobs…..this type of job creation only perpetuates the problem. market demand needs to drive job growth, IMHO. this becomes more difficult with constant govt subsidies distorting the picture.

        1. JLM

          Agree with you completely. The world does not need one more English major as poetry has already peaked as a job prospect. Poetry is a hard gig to break into.We need computer techs, air conditioning repairmen, network engineers, tehnical/vocational educators, technical facilitators, etc. Things which can provide a paycheck, are in demand, increasing demand and which will create taxpayers who will contribute to the taxpaying pool.The government should raise another 20 Army and Marine Divisions to spread the load out. They can disband them after the world settles down which apparently is scheduled for July 2011. LOL

    2. Steven Kane

      I am a fan of Thoreau (quoted him myself previously elsewhere in Fred’s blog).But when using Thoreau as an example of anything, I thinks its useful to remember that, while he is justifiably remembered as a libertarian, environmentalist, free spirit of sorts, in fact he left Walden Pond regularly, like clockwork, each week, to spend the weekend at his mother’s house, where she cooked for him and did his laundry.

      1. fredwilson

        My daughter does that from time to time too. College food and laundry apparently isn’t so good

        1. Steven Kane

          And, once one has moved out of the house, one suddenly realizes the huge value of Mom.;)

          1. fredwilson

            Yes. And dad sometimes too 😉

  25. Shane

    This kind of nonsense makes me sick to my stomach. It’s time that we as a nation voted out every single incumbent in our government and bring in some fresh meat, along with term limits for Congress, and outlawing lobbyists. This type of “reform” is dreadful, and is simply to placate the “investors” who gambled their money in a shyster. It never ceases to amaze me just how ridiculous our government has become…

  26. tmandarano

    Simply put, Big Brother is getting far too large. The self-centered politicians in Washington are too concerned with helping out the lobbyists which help fund their campaigns and get them reelected. Our entire political system is in need of reform. How can we expect good, long term decisions to be made in Washington when politicians are coming and going every 2-4 years?For example, do you believe Senator Dodd truly wants this bill and it was his original idea? Absolutely not, Dodd is not interested in regulating accredited investors… but someone influential is.

  27. Steven Kane

    I don’t know how you can sy “I am not big fan of governmental intervention in technology markets” while being a strong adviocate for “net neutrality”.As you yourself agreed in an earlier post/comments, net neutrality is specifically, explicitly “governmental intervention in technology markets.”I favor net neutrality. But I get very fatigued by everyone’s doublespeak.Government regulation is neither good nor bad. Government IS regulation.

  28. Ted Weitz

    I could not agree more with your comment. As a lawyer representing startups, I am withness to their constant battle in trying to find funds. Almost everyone in the field recommends that the startup fundraising be done through use of Rule 506, to avoid the prohibitive cost of an elaborate disclosure document and filings. But Rule 506 can only be used with accredited investors This is too much of a burden today. Raising the accredited threshold would not protect consumers, it would reduce the number of potential investors eligible to fund entrepreneurs, and have an extremely deleterious effect. Eliminating the federal preemption would also tremendously increase the cost and compliance burden and have a similar effect. The SEC’s rules which limit finders are a third barrier to fundraising that primarily inhibits capital formation, with little consumer protection. Startup funding is an increasingly fragile area that is essential to economic growth and job formation, and burdens should be reduced, not increased. The consumer protection goal of these laws has long ago been lost in the bureaucracy.

  29. John Risner

    Like many other hard numbers in legislation (Alternative Min Tax, FDIC limits etc.) the definition shoujld be indexed for inflation. If over a long period the threshold does not accomplish its purpose, then it should be addressed. MY quick reaction is that the definition of accredited investor should be raised, but I would listen to counterarguents. Changing thresholds ad hoc like this is not the answer. Alas, it is the way the federal gov works.

  30. feargallkenny

    I have a pet peeve that is more local – NYS and NYC related. Even though this is not an incredible amount of money in the bigger scheme of things, we need to lower the thresholds for entrepreneuers to get LLC status and its protections especially in NYC. Right now everyone registering in NYC has to advertise some general gibberish in two publications to meet the NYC LLC Publishing requirements – the NY Law Journal ($700) and some other random publication ($300 in my case for some obscure Westchester Real estate publication). Get rid of those ridiculous and arcane requirements that have no place in a world of instant publishing and Google searchability and you will get a lot more entrepreneurs tinkering with ideas under the protection of Limited Liability. This willl ultimately get more great firms into the Angel andVC funnel

    1. fredwilson

      Yeah. Everytime I pay those bills I get annoyed. I pay a bunch them every year. Its so old school

    2. David Smuts

      How aracne is that?! We can set up an LTD (LLC equiv.) here in the UK same day, online and for only £35 ($50) set up costs, £50 ($75) if you want a mailing address thrown in. While the UK lags behind in access to capital, it has a very innovation-friendly company formation process.

  31. phoneranger

    Obvs too much money flowed to VCs and hedge funds during the boom. And you’ll agree that on the whole that didn’t work out so well. The culprits weren’t the angels or lower HNWIs but rather institutions. Their mandates and time frames are contrary both to the rapid fire antics of a CTA or speculations of a diamond mining VC. In fact, Dodd should disaccredit large institutions for investments in either VC or hedge funds. That would do wonders for your business Fred because you know how to promote yourself to LHNWIs and you’d have less competition from overfunded but underbrained Sand Hill Road VCs

    1. fredwilson


  32. Uday Subbarayan

    Govt should focus more on education. The current 1(private/expensive) or 0(public/free) is not working well.

  33. SMEOnline

    US has always been a role model for Angel investment, we in India have been trying to emulate the same which promotes innovation & startups.

  34. Tom Vander Ark

    Thanks for the heads up. Wrong idea@wrong time, particularly for edu where it’s hard enough to fund start ups. Link to my post below.

  35. jenslapinski

    In Germany, you need to capitalize a start-up with at least EUR 12,500.At the same time, many politicians don’t understand why there aren’t that many start-ups around: “Where is our Microsoft?” The lack of insight and understanding is just mind boggling.Sounds to me as if this proposed bill is going in the same direction. Restriction of capital to supposedly make things safer with only negative impact. What a shame.

  36. Prokofy

    >Things like immigration reform (the start-up visa movement), patent reform (elimination of software patents), net neutrality and open spectrum are all much more important than filing an antitrust case against GoogleWhat I dislike about this distinctly Silicon Valley agenda (and you represent it, too, Fred, even being in New York) is that it takes emotional legal and civil rights issues and pastes them over pragmatic bottom-line business needs and packages them as some sort of hip and progressive movement.Start-up visas, as we can see from the contentious post on TechCrunch this week, are about paying foreign engineers lower wages. Call it innovation, call people who question it xenophobes, that’s the bottom line. It’s about making Americans compete for high-wage jobs that in fact aren’t paying the high wage.Patent reform is a stealth movement by Lessig, Noveck, etc. to eliminate property rights, period. They are “in the way”. No software patents? This is Stallmanitism, the most extreme form of coding.Net neutrality is the ill-named net consumption movement asking, in infantile fashion, for the government (the taxpayer) to pay for large bandwidth consumption rather than metering or distributing this cost to those who need it (Google, the ad agency).Open spectrum also conceals issues of property rights.All in all, these technocommunist ideals are all about making the world safe for giant Soviet-style entities like Google that are state-capitalist monopolists. Is it really independent venture capitalism when you facilitate this process, fattening up the little start-ups for the giant to gobble, or is it participation in an oligarchic New Class?So I’d rather see the government get out of the business of helping the technocommunist state-within-a-state from in fact becoming the state.

  37. kidmercury

    and imagine how bad it’d be if there was no competition……it sucks this much because there isn’t enough competition in the market for governance.

  38. JLM

    Ummm, not to put too fine a point on it, but the Federal government’s appropriate role in regulation is only interstate commerce.This is one of the reasons that the health care system is so screwed up, we have each state regulating the insurance contracts sold in that specific state.

  39. JLM

    The lawyers will have it figured out in about 3 weeks, the white papers will be out in 45 days.Individuals will be forming LLCs and the LLCs will become the investors and straw men be damned!

  40. ShanaC

    Quick question: Why can’t this be done already? What is the threshold to invest via a LLC to become an accredited investor as a shell?

  41. ShanaC

    Yes which is illogical, because people move….so your insurance may cover out of state issues anyway….

  42. Ted Weitz

    An LLC or corporation formed for the specific purpose of buying the securities to be offered is automatically disqualified as an accredited investor under Rule 501, which defines accredited investors, unless all the members are themselves accredited investors, in which case you don’t need the LLC.

  43. JLM

    Why does everybody make the assumption that if one finds fault with President Obama, one must therefore be a supporter of his predecessor?I know W and I like him. He’s smart as hell, well educated and has country wit. He won two gubernatorial elections and two Presidential elections. He was a fabulous Governor of Texas.As President, he was a truly profligate spender and the Republican controlled Congress let him get away with it for 6 years. His characterization as a spoiled brat, entitled frat boy is not far from the truth. He could not hold his old man’s jock.I had an opportunity to spend some long quality one on one time w/ O. He’s a charming engaging whip smart guy. His Presidential campaign was simply brilliant and will be the gold standard for some considerable time. He’s also a vicious opportunist, a naif and a poseur. He is exactly as Hilary described him during the campaign. Inexperienced. He is swimming in the deep end of the ocean with big sharks and he is using “floaties”.If our President bows to one more nasty foreign leader, my head is going to explode.President Obama’s “performance” at West Point will go down in history as one of the most truly bizarre public pronouncements ever made by a war time leader in history —- “we are going to escalate the war but only for 18 months!” Huh?Operational security alone would have suggested not to tell the enemy our plans.How do you discuss a war and never use the word VICTORY?I actually think most of our problems are fairly laid at the feet of the Congress. I think there is probably enough information available to execute, or at least neuter, almost all of the Congress starting with Reid, Pelosi, Frank, Dodd, McCain, Graham…you can have the next 6 picks.So fair? A pox on all their houses!

  44. ShanaC

    Thanks you

  45. fredwilson

    Thanks ted.

  46. fredwilson

    That surge was pretty much the same thing JLM. We escalated, kicked ass, and then high tailed it out of town

  47. JLM

    Would it be accurate to say that the leadership did not announce the withdrawal date BEFORE even committing the additional troops to Iraq?In July 2009, the Pentagon announced it would ROTATE 30K troops while maintaining the same level of troops at least through 2010. So, while there was, in fact, much discussion of a meaningful drawdown of forces in Iraq, the simple truth of it is that the level of troops has remained essentially the same.I am sure this is one of the reasons that the Afghanistan issue has been so difficult. We have the troops but unfortunately we do not have the right number of “fresh” troops.Another jobs opportunity lost is the opportunity to build 20 more Army and Marine divisions. This is particularly opportunistic because the recruits are out there given the economy and it is extremely easy to reduce the size of the military as enlistments expire 2-3 years from now.The challenge is that nobody in the current administration has a real working knowledge of the military. Low hanging fruit missed because of inexperience.

  48. JLM

    Hmmm, the Congress which makes laws (policy) was controlled by the Democrats for the last two years of the Bush administration, by the DEMOCRATS.Would it not be fair to say that George W Bush himself pushed for more control over Fannie-Freddie and was opposed at every turn by Barney Frank and Chris Dodd?I have no brief for any wrongdoers — let the facts inform everybody evenly and let the truth be told — but if your objective is to be fair and accurate, then it seems like you have missed the mark.