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Dan Rosen
Dan Rosen

Seattle angel investor Dan Rosen has worked hard in recent months to shed light on the potentially damaging effects that proposed regulations in the JOBS Act could have on startups, pointing out how the new rules would have the unintended consequence of making it harder for companies to raise money and potentially “cripple” angel investing in the U.S.

Now, William M. Beatty, Securities Administrator for the Washington Department of Financial Institutions, has written a letter to the Securities and Exchange Commission that largely supports the proposals as written.

“We believe these proposals must be adopted in order to ensure that investors are provided a minimal level of protection in a new market where issuers may generally solicit investors without the protections that have otherwise been afforded through the registration process for the past 80 years,” Beatty writes in a Nov. 6th letter to the SEC.

That’s not sitting well with Rosen, or other startup leaders such as Seattle attorney Joe Wallin who said the current regulations would “booby trap” the entire startup ecosystem.

“I was rather appalled that our own state securities administrator would take this position that, at best, makes funding early-stage startups more difficult. And, at worst, will cripple angel investing in startups, and therefore company formation in Washington state for many years to come,” said Rosen, who serves as chairman of both the Alliance of Angels and the Angel Capital Association’s public policy committee.

The main issue here revolves around the idea of general solicitation — the idea that entrepreneurs can publicly talk about raising cash without getting slapped by the SEC.

Joe Wallin
Joe Wallin

Beatty and other regulators are of the belief that startup companies should have to file forms 15 days in advance of them publicly soliciting funds, citing a need to root out fraudsters.

Rosen, Wallin and other startups leaders say that the advanced filing notice is not only a bureaucratic nightmare, but the penalties associated for those who fail to comply either knowingly or unknowingly are too harsh.

In a recent blog post, Wallin, an attorney at Davis Wright Tremaine, wrote that the 15-day pre-notice is the worst component of the flawed regulations.

“The 15 day advance filing deadline is going to trip many companies up,” he wrote. “I think a 15 day deadline AFTER the date of first sale is fair. Does anyone (including the SEC) actually think the SEC is going to review filings and do anything to protect the public during the 15 day advance filing period? I doubt it.”

In a letter to the SEC this summer, Seattle entrepreneur Andrew MacBeth noted that raising money from investors is hard enough, without the burden of additional regulations.

“The 15 day filing requirements are onerous,” he wrote. “The penalty box approach is terrifying for small startups – it effectively would force them to shutdown if they are found in violation.”

But Beatty argues in his letter that the pre-filing is needed to protect investors, especially now that offerings for startup financings will be more public. Beatty writes:

“In order to be able to provide a minimum level of protection to prospective investors in offerings that may be advertised without limitation, it is imperative that an advance Form D filing is required. This will allow for state regulators like ourselves to conduct the limited checks on these offerings necessary to prevent and/or limit obvious frauds and to be able to answer the questions we are asked by the investing public about offerings in this new marketplace. The current post-sale filing requirement contained in Regulation D has been problematic as far as preventing and limiting fraud as well as with respect to answering questions posed by prospective investors. The need to address these weaknesses of the current post-sale filing requirement is magnified by the reality that these offerings are now being made to the public at large.”

As the chairman of the leading angel investment group in the Pacific Northwest, Rosen has written his own remarks to the SEC, pointing out what he believes are a dangerous set of regulations.

By asking the proverbial 2 guys in the garage to take on the same responsibilities that you would require of an established company with on-staff legal departments and millions in revenue is the definition of insanity. Requiring potential investors to turn over personal financial information to a company that has no real ability to keep it secure is ridiculous. But most of all, it strikes me that you are trying to fix a problem that doesn’t exist – angel investors know each other and the risks they are taking. There is little or no fraud in this asset class.

If you do impose a host of restrictions and limitations on the asset class that is working well and is not suffering from any problem other than, perhaps, needing even more capital, you risk causing the capital to dry up for these fragile companies that have driven the US economy.

This is exactly opposite the intent of the JOBS Act.  And, in my humble opinion, contrary to our national interest.  We need more capital going into angel deals, not less.

In an email to GeekWire, Rosen said that he doesn’t think that Beatty truly grasps the potential impact of his position on the startup ecosystem. Furthermore, Rosen said that Beaty appears to have simply taken the “party line” from the North American Securities Administrators Association.

“The position of NASAA is detrimental to the creation of these startups and jobs – it hurts our competitive position and is at odds with the statements of Governor Inslee on promoting startups here,” said Rosen. “I would have hoped that Mr. Beatty would have reached out to local angels and other leaders in the startup ecosystem to help inform his position on this matter.”

Chris DeVore, a leading angel investor in Seattle, agreed.

“We’re clearly failing as a community if this letter can make it all the way through the process with none of us being consulted,” he said.

Below are the letters from Beatty and Rosen, and you can see everyone who has submitted comments on the matter to the SEC here.

Amendments to Regulation D, Form D and Rule 156 under the Securities Act

Dan Rosen letter to SEC

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