How ACA Makes a Difference in Washington


The Angel Capital Association is making a difference in Washington. For the past 24 months, the ACA has made a concerted effort to make sure we take the voice of angel investors to Capitol Hill. A special fund was initiated to help cover the expenses of that effort, our Public Policy Committee put together an all-star volunteer cast of some of the best legal minds on the planet (like Joe Bartlett of Sullivan & Worcester in NY), and we engaged a lobbying firm called APCO Worldwide to help us maneuver our way through the halls of Congress. And it has paid off already.

The initial call to arms came in 2010 when Congress, influenced by North American Security Administrators Association, proposed changing the rules on private company filings (so-called Reg D Filing) that would have made it difficult, if not impossible, for angel investors to continue to invest in private companies. They also had the bright idea to raise the income and net worth bar for accredited investors, as the hurdle had not been changed in 20 years. They were half right, the income and net worth requirements hadn't changed in 20 years. What they did not recognize was that if they had doubled the accreditation requirement, half of all angel investors would not be legally able to invest in startup companies. Over those 20 years, small companies accounted for nearly all the net new job growth in America. Over thos 20 years, professional angels have funded more than 750,000 business with more than $300 billion dollars. These are not beauty parlors, bars and restaurants, these are big employers like Starbucks, Costco, Yahoo!, Paypal and Zipcar.

With the steady hand of ACA Executive Director Marianne Hudson and the Chair of our Public Policy Committee Liddy Karter (Angel Investor Forum and Golden Seeds, we did an excellent job of educating Congress about the implications of a change in accreditation and preventing the changes to Reg D. In the end, the only change to accreditation was that an individual cannot count a primary residence toward the net worth calculation. In short, we won. We were by no means the only voice in that choir, but we were a soaring voice. Current Policy Chair Dan Rosen (Alliance of Angels, Seattle) continues this good work.

That occasion provided us with a seat at the table, and over the ensuing months various and sundry members of our Board, Public Policy Committee, Public Policy Advisors, and ACA Members have not only paced the halls of Congress, but been invited into offices with open arms. I even had the chance to testify to a joint commission of the Senate Finance Committee and the House Ways and Means Committee on the topic of "The Treatment of Capital Gains". As one of my fellow panelists commented before we started the session, "this is a fantastic experience for you, but I fear one that you will prefer to do but once." After perhaps a dozen meetings on Capitol Hill, mostly with eager and very capable staffers, it seemed as if the ACA was making some progress - mostly with a bent on educating Congress about the differences between banking and investing, angels and VCs, how startups are driving new job growth, and how there are no other investors that are likely to fill the void of angel investors - and thus the risk of driving them out of the market through high capital gains rates, and changing regulations like "1202", "256", and influencing the JOBS Act.

What do these regulations mean? They are very, very important to every angel investor. 1202 - shorthand for Qualified Small Business Stock - is now a 100% exemption from capital gains if you have owned a qualified small business stock for at least five years. Congress included this exemption in the Fiscal Cliff debates, and it passed as part of the tax extenders for both 2012 and 2013. My group has used it, and so should you unless you want to pay a tax to the government when you don't have to.

What is SB 256? Part of the American Opportunity Act in the last session of Congress was a bill to provide a federal 25% tax credit to accredited investors who invest in startups. While many of you (in 22 states) have state tax credits for angel investors, the Commonwealth of Massachusetts - where I live, invest, and pay taxes - does not. A federal tax credit of this type could help me increase my portfolio by 25% a year. If the 8,000 members of the ACA angel groups responded the same way that I would, then we would fund a couple thousand more worthy businesses every year.

And what of capital gains you ask? Congress seemed set on increasing capital gains to be "more in line" with ordinary income. Now that would have been a disaster. During my testimony I was beaten about the head by several esteemed members of Congress, since I was closer to the 1% of the wealthiest Americans who have some very attractive tax advantages. I assure you, I am about as far from the 1% as most angel investors. But let's face it, comprehensive tax reform is coming, and wealthy Americans will see their taxes go up. In the short term the 5% increase passed by Congress is really 10% when you take into account the Obama-care tax (3.2%) and the limit on itemized deductions (~1.8%) that most accredited investors will bear. My point in testifying to Congress was very clear, if you dramatically increase the capital gains rate, you will reduce the amount of capital that accredited investors put into startups. These angel investors invest their own money of their own free will, where they live, on Main Street not Wall Street, and at great risk. They are not bankers, fund managers or VCs. And the fund managers, VCs and banks just won't invest in the high risk, illiquid startups that angels do. But more than that, angels also provide expertise, mentorship, and governance. And while there is not a huge amount of return data, my suspicion is that our rate of return is at least as good as the traditional VC industry.

The ACA has shown that many small voices can be very loud in Washington DC. Our President and members of Congress care about our economy and jobs. Ergo, we get their attention when what we do so quietly on every Main Street in the US is brought to their attention. What can you do? That's an easy one …. your ACA dues help us fight the good fight. More than that, you can ask for an audience with your state's members of Congress (and/or their staff) to reinforce the message we put forth. Angel investors don't need a lot of regulation - it turns out we are an honorable lot, as there is almost no fraud in the private offerings that angels invest in.

And what of the JOBS Act you ask? There are some very interesting aspects of the JOBS Act that could reshape our ecosystem. Personally I think the early on-boarding component will have a more important impact on my group than, say, unaccredited Crowdfunding. But that is a topic for the next Chairman's blog!

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