angel-inv.jpgHidden in the recently proposed Restoring American Financial Stability Act of 2010 are a few provisions that would make it slower and tougher for entrepreneurs to connect with angel investors. That's got some entrepreneurs and funders steamed, saying the changes could cripple angel investing at a time when traditional bank loans are hard to find and make it even harder for small businesses to pull the economy out of recession.

The provisions causing the ruckus would:

• Require companies seeking angel funding to file papers with the Securities and Exchange Commission, which would then have 120 days to review it. So it adds an administrative burden and slows down the process. 

• Grants states the right to control the offering of unregistered securities -- sometimes known as private placements -- under federal Regulation D. This creates a potential paperwork mess, as now it's a single federal standard. Entrepreneurs would have to learn and understand the laws of various states if they wanted to offer investors in other states the opportunity to fund their business. Yecch.

• Raises the threshhold for an "accredited investor," the very type of wealthy individuals who make up the angel-investor pool. Accredited investors can register with the SEC and demonstrate they are savvy investors who understand high-risk investments like angel funding. The proposal is to raise the threshhold for qualifying as an accredited investor from the current $1 million to $2.5 million. 

This last one is possibly the worst provision in the lot, as it would shrink the pool of qualified angel investors! Not sure what Sen. Chris Dodd is thinking with this one. I don't know anybody who thinks millionaires don't have the financial savvy to invest their money...until they earn that second million.

The Kauffman Foundation has already blasted back against the proposal, saying the changes are unnecessary and will hurt small businesses.

I generally agree...except that the idea of having entrepreneurs do a filing with the SEC before they raise angel funds intrigues me. Yes, it's more paperwork and the process would go slower. But it might have two beneficial effects 

1)  making entrepreneurs do more work on their business plan, financials and projections to meet SEC requirements

2)  providing a sort of winnowing effect where flakier businesses would fall out of the running, leaving a clearer field for stronger concepts to connect with angels

Would the finance proposal smooth the way for great startups, or stymie them? Haters have already started circulating a petition opposing the Reg D change. Leave a comment and let us know your thoughts.