Arnold Kling  

The Ugly Side of Financial Reform

House Prices Are Region... Gokhale on Social Security...

Venture Beat reports,

Dodd's bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an "accredited investor" who can invest in startups -- if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

One of the scariest phrases in the English language is "comprehensive reform." It means large legislation, studded with these sorts of land mines. If you really want to create a jobless recovery, then I recommend enacting legislation that makes it harder to start a business.

Of course, anyone who votes against the bill will be branded as an opponent of necessary financial reforms.

Comments and Sharing

COMMENTS (17 to date)
Doc Merlin writes:

With these land-mines, I don't see "jobless recovery" in the horizon, just "jobless."
'L' shaped 'recovery' looks more and more likely all the time. Also, I agree with tyler in that its not regulatory uncertainty that is driving the problem lengthening. I think it is more bad regulation that is driving it.

ThomasL writes:

Would anyone care to theorize on what this section is _supposed_ to be doing?

8 writes:

Maybe they are factoring in a 50% rapid devaluation of the U.S. dollar.

Bob writes:


The SEC provision is the real problem IMHO - both asinine and redundant with raising the accredited investor requirements. Which, in itself, is a reasonable thing to do in this bill (if you accept the concept of allowing accredited investors to make decisions without the SEC's oversight) because in real terms the cut-offs have fallen sharply over the years. But why bother when you're sticking the SEC into the process anyway?

I conclude that you will not find a coherent rationale for this trio of rule changes.

BTW, not sure about the last - generally I don't like one-size-fits-all Federal rules, but the wording suggests that following the Federal rules is currently an option rather than a requirement.

Les writes:

I don't understand what a "jobless recovery" means.

If its jobless, it does not seem to be a "recovery." And if it is a recovery, what good does it do if it is "jobless?"

What am I missing?

Richard writes:


"Recovery" means GDP growth. Jobs aren't economic activity -- they're a cost of economic activity. After all, most people would prefer leisure, but for that darned fact that you need to earn money to pay for stuff. So your question reflects a fallacy that economists call "make-work bias."

Dan Weber writes:

Aren't we all in agreement that out-of-control angel investing caused the recent financial crisis?

Ryan Vann writes:

Very cheeky Mr. Weber, very cheeky indeed.

R Richard Schweitzer writes:

Lamar Alexander (addressing Obama at the fete):

"We don't do comprehensive well."

Andy writes:

I'm a complete laymen around this stuff, so please forgive my likely dumb question, but I'd like to make sure I understand (in plain english) what this section means. Here's what I think it means:

1 - "startups raising funding" = potential new businesses that are trying to get people to invest in their new business. Is this only for new businesses that are planning to be publicly traded? Are there floors on this (say I need $50k to open a donut shop and I ask my family for the money - do I need to file?)

2 - "raises the wealth requirements for an "accredited investor" who can invest in startups" = I would meet neither of those requirements, but if I could scrape together $50k to help a friend start a business I wouldn't be "accredited" so I wouldn't be able to?

3 - "angel" = I have NO idea what this is?

Can you guys help me out.


Yancey Ward writes:

Just where in the bill do they tell you where to direct the bribes in order to start/invest in a business?

R. Pointer writes:

I would like to know why Venture and Angel financing is even in this legislation. They had nothing to do with this crisis.

Dodd should be unelected as fast as possible.

ThomasL writes:


An angel is a rich private investor. The idea is sort of like venture capital, but an angel is (a) investing his own money and (b) usually investing smaller amounts, like a few hundred thousand dollars.

Babinich writes:

"If you really want to create a jobless recovery, then I recommend enacting legislation that makes it harder to start a business."

The rules are confusing, the roles ill-defined and the paperwork is overwhelming.

Government has to be the leader in implementing solutions that lead to negative consequences.

Bob writes:


You could lend your buddy $50k, no problem. What your friend could not do is formally solicit and raise capital from (sell stock to) investors without abiding by the rules. The rules cited here would not impact informal investment but would hinder organized investment into young companies.

Whether a business "plans" to be publicly traded is not relevant to SEC-related regulation. How many people, and who, they solicit and take money from is the key. Which makes sense if you think the SEC has a role to play - an obvious thing you would want to stop is telemarketers "marketing" random stocks to the phone book.

Mr. Econotarian writes:

As someone who started an angel-funded corporation, I can tell you this change would have kept out many of the investors in my company. This is nuts!

dave tribbett writes:

Great Post! HERE is a post that talks about the WTO and the FSA agreement signed by Clinton in the 90s, this was the start of the financial meltdown and severely limits our government’s ability to create financial reform of any kind.

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