On Friday, Engine submitted comments to the Senate Committee on Banking, Housing, and Urban Affairs outlining a number of policies that we believe will improve the capital access landscape for startups and entrepreneurs and encourage the formation of new businesses.
The Committee’s leadership initiated the request last month as an opportunity to gather legislative proposals to increase economic growth in the U.S. Noting the critical role that startups play in driving growth and innovation, creating jobs, and transforming communities, we proposed four specific policy priorities that we argue would help to create more sustainable capital streams for entrepreneurs. Read our full submission here, or check out a summary of our priorities below.
Priorities Outlined in Submission:
1. Clarify regulatory ambiguities around general solicitation for pitch events and demo days.
We urged the Committee to take up and approve the Helping Angels Lead Our Startups (HALOS) Act (S.588), which would clarify regulatory ambiguities around general solicitation for pitch events and demo days. As we have noted before, pitch events and demo days have become a rite of passage in the life cycle of today’s startup. However, startups participating in these events could unintentionally violate rules banning general solicitation to non-accredited investors if they do not adequately vet their audience to ensure that everyone in attendance is an accredited investor. The HALOS Act would remedy this by excluding demo days from the general solicitation requirements, making it easier for startups to publicly showcase their ideas without accidentally running afoul of securities laws.
2. Improve the Title III equity crowdfunding landscape.
We called on the Committee to consider policies that would improve the Title III equity crowdfunding landscape . Pulling largely from analysis in our October 2015 white paper, “Financing the New Innovation Economy: Making Investment Crowdfunding Work Better for Startups and Investors,” we highlighted four specific modifications to the current framework: raise aggregate funding limits, permit special purpose vehicles, reduce existing disclosure obligations, and allow for “testing the waters.” As we noted in the submission, we believe that these changes (many of which were included in Congressman McHenry’s Fix Crowdfunding Act) would “help create a more vibrant non-accredited investor crowdfunding market.”
3. Remedy the “99 Investor Problem.”
We highlighted the importance of remedying the so-called “99 Investor Problem.” Under current securities law, the number of investors who can act as a coordinated group to invest in a company is capped at 100. As online fundraising has increased in popularity, it has become a common practice to group investors into what are known as investment LLCs, or “syndicates,” to mitigate risk, simplify cap tables, and diversity portfolios. However, these syndicates are limited in the number of investors they can have, which excludes sophisticated investors from funding the startups that they want to and limits the capital available to companies. Engine is supportive of Senator Heidi Heitkamp’s Supporting America’s Innovators Act (S.444), which would raise the cap to 250 and already passed the Committee in March. In our submission, we reiterated our support for this legislation and called on the full Senate to take it up and pass it as expeditiously as possible.
4. Retain the current accredited investor financial threshold and add qualitative measures for investor sophistication.
In our submission, we urged the Committee to refrain from increasing the current accredited investor financial threshold and add qualitative measures for investor sophistication. We believe that the current financial thresholds ($200,000 income for an individual/$300,000 for a couple or $1,000,000 in net worth) are sufficient for protecting investors, and should not be indexed to inflation. Citing to a more in-depth submission to the Securities and Exchange Commission from last year, we noted that adjusting the existing threshold to inflation would substantially diminish the already limited pool of people eligible to fund startups, in turn damaging the ability of entrepreneurs to raise capital. Instead, we called on the Committee to explore policies that would maintain or expand the number of eligible investors, including adding qualitative measures for investor sophistication that could be used to establish accredited status.
Photo courtesy of the Senate Banking Committee