Dodd’s Bill: Harmful to Medical Device Start-Ups?

A financial reform bill currently moving through the Senate is causing a furor among businesspeople and investors, with experts predicting that the bill will harm innovation in America.

Sen. Chris Dodd (D-Conn.), Chairman of the Senate Banking Committee, has proposed a 1,400-page financial reform bill that was spurred by the public backlash against the Wall Street banking scandals of 2008. Among other provisions, the bill would require that entrepreneurs wanting to start a new company must first file with the U.S. Securities and Exchange Commission (SEC) and undergo a 120-day review before they can receive money from investors. Opponents of the bill argue that four months is an eternity for a start-up, and that fledgling companies usually need the money immediately. The registration process itself could drain vital seed money from start-ups. Seeking Alpha contributor John Mauldin pointed out in a recent post that registering with the SEC can cost up to $100,000.

Many believe that the bill, if passed, would have a chilling effect on job creation as well as innovation. According to the Wall Street Journal, companies that are less than 5 years old make up less than 1 percent of firms but generate about 10 percent of new jobs. The WSJ points out that companies less than five years old accounted for all net job growth in the U.S. between 1980 and 2005.

Rick Brimacomb, founder of investment advisory firm Brimacomb and Associates, believes that the bill is detrimental to medical device start-ups. He says that start-ups have two currencies: time and money, both of which are in short supply. Instead of using their limited resources to develop a product, file a patent, or pay an employee, entrepreneurs could wind up spending tens of thousands of dollars just to register with the federal government. “That’s a horrible burden to put on a company at a critical juncture when the reality is that they don’t have that money,” says Brimacomb, whose past clients include ALung Technologies and ProVation Medical. “This is like throwing a bucket of cold water on somebody who’s trying to start a fire with two sticks.”

The bill also would have raised the minimum wealth requirements for an accredited angel investor. Currently, accredited investors need to have either a net worth of $1 million or an income of $250,000. The new bill would have adjusted for inflation, increasing those thresholds to $2.3 million and $450,000, respectively. The bill also would have required investors to meet both thresholds. One trade group estimated that 77 percent of current accredited investors would be disqualified under the new bill. Business writers, financial publications and bloggers voiced vocal opposition to this provision of Dodd’s bill. Christopher Farrell of Business Week called the provision “a step in the wrong direction.” Writer Rick Tumlinson of the Huffington Post called the bill “an angel killer.” Dodd recently amended the bill to keep the asset and income requirements at their current levels, although the value of the investor’s primary residence would not be included.

Brimacomb believes that raising the bar for angel investors would be just as damaging as requiring start-ups to file with the SEC. Because of the economic crisis, many angel investors don’t have as much money as they did three years ago. Raising the income requirements when the economy has driven down net worth would be a “double whammy,” says Brimacomb. Companies such as Amazon and Google were initially funded with angel dollars.

Dodd’s office did not return a phone call seeking comment. Republicans voted Wednesday to let the bill move forward, although the GOP plans to propose amendments to it.The bill had been stalled in the Senate on Monday, as Republicans voted to block it from reaching the floor for debate. The vote was 57-41, just 3 votes short of the 60 needed for the bill to move forward. The same thing happened in another vote on Tuesday.

We’d like to hear your take on Sen. Dodd’s controversial bill as it relates to the medical device and biotechnology industries. Will the bill help prevent another Goldman Sachs from occurring, or will it harm innovation and job creation? Please post your opinion in comments.

The comments are closed.