AngelList pushes back against proposed SEC rules: Vital action, bad politics, or both?
Actions by AngelList and others in the startup community to push back against proposed Securities and Exchange Commission rules for "general solicitation" that could make life hard for startups amount to a “political mistake,” a tech-political consultant has said.
Last week, AngelList CEO Naval Ravikant submitted a letter to the SEC outlining concerns about new filing rules that he thinks “could create disastrous unintended consequences for the startup community.”
The rules would be implemented under the JOBS Act as part of a new provision that allows companies to advertise the fact they are raising money. Over the weekend, AngelList backed up Ravikant’s letter by launching a website that asks supporters to describe the impact the proposed rules would have on startups.
Objecting to onerous administrative requirements and a non-compliance penalty that would prevent startups from raising any money for a full year – a potential death knell for many early-stage companies – AngelList highlighted three trouble points among the proposed filing rules, namely that:
Startups must notify the SEC 15 days before publicly discussing raising money
Startups must file documents with the SEC every time they update their offering materials
Startups must include legal boilerplate every time they talk about the financing publicly
While well-intended, however, Ravikant and AngelList’s moves send the wrong message to Washington DC, potentially compromising the relationship between regulators and the tech industry, said Craig Montuori, director of tech-political consultancy Politihacks in a blog post. (Montuori is an independent consultant but has done some work for FWD.us.) Montuori believes the problem to be solved is not overly restrictive rules, but a lack of trust between the tech industry and DC bureaucrats.
Montuori said that the tech industry has not been involved enough with the regulatory process of the JOBS Act since it passed in March 2012. “At this point, we’re in a hole, having been disengaged this past year and change,” Montuori wrote. “To come in shouting now comes across as usual tech-in-politics arrogance.”
In a follow-up interview, Montuori said that the SEC’s proposed rules don’t come out of thin air. They are a result of a process, and it’s apparent that existing securities interests and consumer protection groups have been more involved with that process than has the tech industry.
“We were very well engaged with the legislative process and less engaged with the regulatory process,” Montuori said.
Ravikant, however, says he was merely taking the opportunity to respond to the SEC’s call for feedback on the proposed rules, which would take effect as of September 23. And he’s confident the startup community’s concerns will be heard.
“I think they’ll listen,” said Ravikant. “If you look at the comments on the SEC site, they’re running heavily against the Form D filing rules.”
Ravikant, however, did walk back some of the more provocative language he used in his submission to the SEC. In the letter, he suggested the new rules would “impose death penalties for noncompliance.” The one-year standdown for falling foul of the rules would be enough to kill the prospects for many startups, many of which don’t have enough funding to last a year without seeking capital from investors.
In an interview this morning, Ravikant says he now regrets the “death penalty” comment. “That’s unfortunate because it’s going to get the SEC’s hackles up and make it less likely to have an impact,” he said.
Still, other startup ecosystem stakeholders and observers believe Ravikant’s concerns are valid and support the strong pushback.
Joe Wallin, a Seattle-based lawyer focused on startups, has been following the SEC regulations process closely. He says there’s a reasonable likelihood that the eventual rules around general solicitation will look similar to the proposed rules. That would be bad news for startups, he said, because the rules are so harsh that “they could really throw a monkey wrench into a lot of things.”
“It’s going to booby trap the ecosystem,” said Wallin, who is also the editor of the Startup Law Blog. He hoped that a clear response from the startup community would help change the SEC’s mind. “The industry really needs to do its best to articulate all of its best arguments to oppose these rules.”
Meanwhile, SecondMarket CEO Barry Silbert believes there is still room in the regulatory process for compromise. The SEC typically starts on one end of the spectrum and waits for the business community to identify the areas that could create problems, he said. He believes the rules will be pared back, but that it’s important that it hears from startups and the investment community. SecondMarket is in the process of writing its own letter to the SEC, he said.
“They’re not trying to shut this down,” said Silbert of the SEC and its approach to general solicitation, “they’re just trying to find the proper balance between capital formation and investor protection.”
[Image via Shutterstock]