Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, spoke on the House floor in support of H.R. 1219, the Supporting America’s Innovators Act, a bipartisan bill that would make it easier for more angel investors to finance startup companies and small businesses:
As Prepared for Delivery
H.R. 1219, the Supporting America’s Innovators Act, shows just how well we can work together to craft bipartisan solutions that support our nation’s innovators and the jobs they create.
Last Congress, Mr. McHenry came to me with a problem: sophisticated angel investors, who fund promising startup businesses, want to pool their money together, but the law effectively caps them at 100 investors per fund. If more than 100 people want to invest, the fund is forced to exclude some of them from the deal to avoid registration and regulation as a quote “investment company” unquote under the securities laws. That means investors willing to commit capital are being turned away and startups are losing out on important early stage funding.
I worked with Mr. McHenry to fix this problem in a way that adequately protects investors and promotes capital formation for growing companies. The result of our bipartisan negotiations is H.R. 1219, a bill that would narrowly increase the investor limitation from 100 to 250 persons for certain venture capital funds, provided that the fund does not have more than $10 million in total investor capital.
This type of fund structure is used today by AngelList, an angel investing platform that connects investors meeting certain income and asset thresholds with one another so that they can pool their money into special-purpose funds, which then invest in a particular start-up company. Importantly, both the companies and the investors benefit from this structure, compared with making hundreds of smaller direct investments. A company, for example, only has as a single point of contact -- the angel fund advised by a fiduciary -- rather than hundreds of investors who must all individually approve corporate actions, such as mergers and acquisitions and expanding ownership. Investors also like this structure because they can delegate monitoring the start-ups they invest in to the investment adviser to the fund. Such monitoring may be significant considering that investors, recognizing that most early stage companies fail, typically diversify their investments among 30 to 80 companies.
H.R. 1219 reasonably promotes this fund structure for start-up investments by providing a narrowly tailored exemption for certain venture capital funds, which must invest at least 80 percent of their funds in small businesses. Under the bill, the venture capital funds must have no more than 250 investors and no more than $10 million in investor capital, ensuring that they are small enough that investors are able to monitor and manage their investments.
The bill’s limits also ensure that we are not creating a loophole for other investment companies, like mutual funds, to avoid regulation, nor are we providing relief to other private funds, like hedge funds or private equity funds, that have very little restrictions and investors protections.
Mr. Chairman, too often Congress seeks to help small businesses by repealing sensible guardrails and rules of the road with little to no thought on the impact on investors or market integrity. This is a mistake, since it is investors that provide the money necessary for small businesses to grow. If investors don’t trust the markets to operate fairly, they will decline to invest or raise costs on the very businesses we want to help.
But, H.R. 1219 is different and reflects a measured, bipartisan approach to promoting our nation’s start-ups and the investors that take a chance on them. So, I thank Mr. McHenry and Ms. Velazquez for their leadership on this bill and I urge my colleagues to vote “Yes.”