Senator Dodd – Making it harder for small businesses to get funded

Several of my Seattle friends pointed out that Senator Dodd has proposed changes to the regulations that govern angel and VC investments.

Every time a VC or angel investor participates in a venture financing, there is a Reg D statement that is filled.  Currently, it’s a federal file that you file with the feds and then each of the states involved (company domicile, investor state, etc.) accepts the Reg D form. This is good because companies only have to pay to comply with one set of rules, rather than many.  The Dodd legislation would repeal the existing federal preemption of state regulation over “accredited investor” securities offerings. States would then, presumably, have to come up with their own rules and standards. 

It is important to have uniform regulation of securities offerings.  Otherwise the costs increase for everyone as startups are required to comply with differing state-by-state laws.  As state laws drift away from each other, eventually this might include startups having to hire multiple legal counsel.  It’s simply a waste of good capital, unless you are a lawyer who wants to make more money.  (In all fairness, the folks who pointed this all out to me ARE lawyers and aren’t concerned with billable hours, rather their clients). 

I am not sure why Senator Dodd would want to change this.  I have no experience in anything going “wrong” with the current regime.  It has been around for decades and the system works well.  There is no compelling reason to add these new costs to the companies and their investors.  I’d like to know what is driving this proposal. 

If you agree, there is an online petition.  Please sign at

  • Jason, thank you for posting on this topic. I hope someone in Congress stops this.

  • Form D is a bit of a half-measure. It created a standard form for use in all 50 states- and the fact that it is electronic now is great- but it is a very LONG form compared to most state filings.

    States can also glom on their own requirements in addition to Form D, which reduces a lot of the benefit of having the single form AND firms still need to keep updated information on state blue sky procedures because of these requirements, so time/cost savings are lost there as well.

    On top of that, several states have self-executing exemptions, so under non-Reg D procedures there is literally nothing to do in order to claim the exemption.

    Last, most offerings involve only a couple of states at a time, so the burden on any individual client is usually not that high.

    Firms here in the Bay Area seem to be split on whether to go the Form D route or state law blue sky. I haven't noticed a cost, time or complexity difference either way.

    I'd love to see a genuinely uniform securities registration exemption process. Unfortunately Form D is not it.

    In the end, though, I think I agree with you insofar as Sen. should not throw the baby out with the bath water. Uniform, electronic, click-to-add-state exemption procedures would be ideal.

  • Someone had a good find amid a 1,136-page draft legislation.

    If you want to look for yourself, look at PDF p. 687 of… and cross reference against PDF p.32 of

    Disclaimer: Jason and I have co-taught at CU Law before, so agreement here may not be shocking.

    In addition to entrepreneurship, I teach and research in the area tech policy. The result of patchwork state regulation in telecom regulation is not uniformly inspiring. The benefits are not always clear while the costs of compliance with inconsistent patchworks are often considerable. It would be interesting to know what significant benefits the proposed revision seeks to capture.

    • Brad, credit for the find — fishing 9 lines out of an 1100+ page bill — goes to Joe Wallin of DWT in Seattle. He first aired this in a comment to my blog over a week ago.

      • Bill, thanks, but I think credit belongs to Alan M. Parness of Cadwalader, Wickersham & Taft LLP for finding this.

  • Jay, because of federal preemption, all states can generally do now in addition to taking the Form D is impose a fee in connection with a required notice filing. See Section 18(c)(2)(A) of the Securities Act of 1933 ("Nothing in this section prohibits the securities commission (or any agency or office performing like functions) of any State from requiring the filing of any document filed with the Commission pursuant to this title, together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the State (if such sales data is not included in documents filed with the Commission), solely for notice purposes and the assessment of any fee, together with a consent to service of process and any required fee.)". Without federal preemption, states could and would do a lot more, like impose merit review on securities offerings in their states.

    In fact, Section 18(a) of the Securities Act lists the things states used to do, such as: requiring registration or qualification of securities, prohibit, limit, or impose conditions upon the use of offering documents; prohibit, limit, or impose conditions, based on the merits of such offering or issuer, upon the offer or sale of securities.

    Repeal this law you would go from one national, simple rule to potentially 50 different rules, none of which are consistent with one another. It would be a big step backwards to do this, and impose a lot of additional cost and expense on early stage companies.

  • What you think about news – GOPers Hold ‘Prayercast’ to Ask God to Stop Health Reform ?
    Wanna hear your opinion

    • I hadn’t heard of that.  Wow.  Sounds like a meeting that I wouldn’t be invited to.

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