As the U.S. Senate begins to haggle over the Financial Reform bill, one would think that the fixes proposed would benefit the economy, not harm it. One of the provisions would impose new regulations on ‘angel capital’, private investors who help fund business start-ups. The start-ups, themselves, would have to apply to the SEC for approval, the same as any financial trading company. A waiting period of 120 days would be imposed on the start-up before accepting any investor funding. Only then, the investors themselves would be required to pass ‘accredited’ status, meeting certain minimal asset requirements.

Angel investors help fill the gap in between ‘FFF’ investors (family, friends & ‘fools’) and venture capitalists (large capital lending firms that represent everything from pension funds to private and public institutions). Angel investing usually comes into play during second-round funding as start-ups undergo their first major expansion. Companies that generally have survived one-to-three years and have something of a track record. Angels account for roughly 39% of all investment capital for start-ups, the single largest source. Most larger venture capital (VC) firms and conventional lending institutions tend not to lend to start-ups for sums less than $1 Million dollars. In 2007, the average ‘angel’ investment was $456,000 as angels provided over $26 Billion in funding to some 57,000 companies. To compare with VC firms, they lent over $30 Billion to just under 4,000 start-ups.

Since the 1990s, the vast majority of job creates have come from small businesses. Prior to the Internet boom, small businesses accounted for roughly 2/3rds of all new jobs in the ‘private sector’, with small businesses defined as companies with fewer than 500 employees. With the Internet boom, small business job creation increased dramatically. In the past 10 years, they now account for nearly 95% of all new, ‘private sector’ jobs created. Perhaps the largest growth areas during this period where angel investing has had a significant impact is with software (~27%), health-medical services and technology (~19%) and biotech (~12%) companies, according to the University of New Hampshire Center for Venture Research. For larger deals, angels commonly form groups or ‘angel networks’, where between 10-150 individual investors share the research and the risk.

Angels tend to be sharp investors despite the risks. Even with their help, just over a quarter of start-ups fail, usually between the 4th and 7th year. The average return on an angel investment is a whopping 27.7% annually! Not bad at all! Gee, wouldn’t it be nice if these folks were running our government! A typical angel provides funds and does not get paid off for 5-10 years, so these are clearly not hit-and-run speculators. These are people who can recognize potential and are prepared to think long-term. Just the sort of entrepreneurs our country needs these days!

The Senate Financial Reform bill increases existing minimum asset levels for angels. Under the bill, the minimal assets to be considered an ‘accredited investor’ will go up from $1 Million to $2.3 Million. Annual income, which is also a consideration, will increase the minimums from $250,000 to $450,000 per year. The bill also caps the number of angels a start-up may have invest in it to no more than 500. Since angels are investing their own money and assuming all of the risk themselves, one has to wonder why there are any restrictions at all on them? Since the Crash of 2008, angel investing has slumped over 30% as has VC funding, down some 27%. Think the government is helping? In 2009, the Small Business Administration only accounted for 1%, that’s right – ONE PERCENT, of total lending to start-ups! Banks, which normally require assets of 10-15% before providing start-up loans, now demand 40-50% in assets before loaning to start-up companies. Obviously, angel investors play a significant role in economic expansion and job creation. Any new restrictions by Congress will have a negative impact on GDP and job growth.